$166 a barrel? Middle East oil gives clue to where all prices could be headed if Iran war drags on

The extreme spike in oil prices seen in local markets in the Middle East could give investors a glimpse into to where U.S. and Europe prices are headed if the Strait of Hormuz isn’t opened soon.

Dubai crude oil prices surpassed $166 a barrel to a new record high on Thursday, according to market data provider Platts. Dated Brent and West Texas intermediate Cushing’s are trading around the $100 mark after historic runs higher.

The local markets for oil are often overlooked, but are now seen as a possible precursor of what could be ahead if the conflict doesn’t end soon.

Dubai and Oman current prices reflect the steep severity of the shortage in the Gulf, according to Natasha Kaneva, JPMorgan’s head of commodities research. But that doesn’t mean the American market will be spared another sharp jump, she said.

“If the Strait does not reopen, this divergence is unlikely to persist,” Kaneva said in a note to clients this week. “Brent and WTI will ultimately reprice higher as Atlantic basin inventories are drawn down and the global market is forced to clear at a materially tighter supply level.”

West Texas Intermediate crude is not seen as an ideal substitute like Oman, said Andy Harbourne, senior oil markets analyst at Wood Mackenzie. But it could become a more sought-after alternative if transit through Hormuz remains depressed, given that buyers will turn more desperate.

The Strait of Hormuz, a key passageway connecting the Persian Gulf and sea, is where around one-fifth of the world’s oil transits. Daily transit calls have tumbled to nearly zero from highs above 120 seen earlier this year, data analyzed by Charles Schwab shows.

Prices for crude directly leaving Middle East countries such as Dubai has risen faster than oil like WTI that doesn’t usually go through this Strait in large sums, said Harbourne.

“Everything stems as a function of the duration of the closure of Hormuz,” Harbourne said. “The whole market is kind of updating its assumptions in real time.”

The Strait is most commonly utilized for fuel heading to Asian countries such as China and India. Because of that, the Dubai price surge is more pronounced in the Singapore market than London.

At energy research firm Rystad, analysts have begun tracking Dubai’s London market price or using so-called swap tools rather than the Singapore level. The price in Singapore can basically be ignored given the intense disruption in the Asian market, according to Rystad’s Susan Bell.

“It’s almost a fictitious price,” said Bell, the firm’s senior vice president for commodity markets. In other words, the price on the Singapore market, despite being widely tracked in normal times, is “a bit pie-in-the-sky right now.”

Still, Harbourne said ripple effects from Dubai oil’s jump in Singapore can already be seen elsewhere. Oman crude, which is considered the same quality as Dubai but is transited outside of Hormuz, has seen demand soar with Dubai’s transit mostly halted, he said.

While the global benchmark for oil has risen less sharply than Dubai or Oman, prices have undergone a significant shock in their own right. Since the start of the war through Wednesday, Brent’s May contract has jumped more than 48%. Year to date, it has surged more than 76%.

Still, Harbourne of Wood Mackenzie doesn’t expect U.S. oil to completely converge with Asian market moves if flows begin normalizing by late April. Rystad’s Bell also said that if WTI or Brent crude was to go the way of Dubai’s price in Singapore, it likely would have happened already.

There’s a simpler explanation for Dubai’s premium, Bell and Harbourne said. Oil transiting Hormuz would typically require lower transportation costs to get to destinations in the global East given its proximity. Crude heading thousands of miles to those destinations from the U.S., on the other hand, would mandate higher delivery fees.

“The pricing gap between the West and Asia is sending some important signals for the market,” Harbourne said. “It’s telling the West to move oil to Asia.”

More broadly, analysts said that higher costs for oil and transportation as a result of the Strait’s prolonged closure will lead to sticker shock for consumers. In addition to drivers feeling pressure at the gas pump, rising fuel costs for trucks and ships can also be passed down to shoppers.