Are Oil Price Spikes Fundamentally Driven or Just Headline Noise?

As supply shock makes its way through the energy market with the war on Iran still underway investors are trying to gauge if the price increase is fundamentally driven or purely reaction to the nonstop headlines. Actually, the answer is a lot of both. Clearly most everyone is familiar with the Middle East and the importance of the production in the region but also the need for safe access in and out through the waterways, namely the Strait of Hormuz. With practically 20% of the global energy production, the Middle East will always garner strict attention when supply disruptions occur, and this is the largest in recent memory if not historic.

Asia’s Import Dependency

The big concern isn’t the ability of the largest consumer obtaining petroleum needs as the U.S. is more than self-sufficient, the issue lies with India China and Japanese imports which are now curtailed. While China is sitting with massive storage doesn’t completely change the narrative, Its still less flowing energy and that’s a problem.

Two Key Factors Investors Should Watch

Two important things to consider, one being floating storage. Currently, the floating storage of oil in tankers is at an all-time high of nearly 400 million barrels world-wide and when you consider the relatively small amount no longer coming out of Iran it makes sense to assume that this is not a make-or-break situation to get oil flowing out of the Persian country tomorrow. By utilizing the floating storage importing nations can bridge the time between now and what is hoped to be a resolution coming before too long.

Second thing to consider is tapping reserves in the U.S. and abroad of already stored oil, may make lots of economical sense. If you consider the prospects of Iran producing and allowed to export its previous capability of 4 MBPD along with Venezuela returning to its glory days of being an oil powerhouse producing over 3MBPD the chances of global overproduction are quite realistic.

The Longer Game

While a rebound of this magnitude is certainly possible and quite likely, this luxury for importing nations is in the future, perhaps years in the future. But historically with the likes of China, they are notorious for buying low and using high and tapping their reserves along with the massive amount of floating storage now with the idea of more plentiful supplies in future will become a very attractive scenario.