Oil climbing

Three tankers have been hit by projectiles in the strait over the past few days. The point of friction: Iran is contesting the shipping lane along the Omani coast, which many vessels use as the standard route. Tehran wants ships to transit through its own waters instead, which would give it direct control over the strait. We think Iran will get its way.

Washington has responded by striking certain Iranian sites and revoking the general license that authorized sales of Iranian oil.

This won't be a problem for China, which has already taken advantage of the pullback in Brent and record price cuts to buy up Saudi crude. With its reserves, Beijing is clearly in no rush to go back to sanctioned Iranian oil. China is also getting back to normal on refining: it has lifted restrictions on refined product exports for July and allowed Zhejiang Petrochemical to resume shipments after more than three months on hold. Its refineries are working through their oversupply.

On the US side, the SPR has fallen to its lowest level since 1983, at around 325 million barrels at the end of June, and it keeps declining. Washington is still using its strategic reserves to keep pump prices in check, but the room to maneuver is shrinking. Time is working against them: the longer this drags on, the fewer tools the administration has to respond, the higher the risk of a sharp price shock, and the midterms are approaching!

We think the US will ultimately accommodate Iran's demands over the strait.

The risk premium will stay elevated, but we don't see a return to very high Brent prices. We're avoiding pure upstream names and the integrated majors, except for those with meaningful exposure to US LNG, Shell and TotalEnergies above all. We remain positive on oil services: Technip Energies, Saipem and Técnicas Reunidas.

Uncertainty remains high. We expect more tension going forward until (if) a final agreement is signed. The prevailing view in the market remains that these tensions will ease and that the US will eventually have to cave in to Iranian demands, notably on the toll for passage through the Strait. Indeed, the administration would like to have peace and lower gas prices ahead of the mid-term elections. 

Yet should this view be challenged, Oil could quickly jump with Brent back in the USD85-95 range. 

Any rise in oil prices is positive for majors, and we like Shell and Total the most (Shell upgraded its gas targets yesterday and said trading would be strong). Also, a rise in Brent is an indirect positive for Norsk Hydro (partially integrated), and a rise in electricity directly translates to aluminum prices. 

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