(Bloomberg) — Oil dropped as Iraq signed a deal to resume exports via Turkey that avoid the Strait of Hormuz, and as the US stepped up efforts to force the reopening of the key waterway.
Brent fell below $101 a barrel, after adding more than 3% on Tuesday, while West Texas Intermediate was near $93. Iraq agreed with Kurdistan to resume oil exports through a pipeline in the semi-autonomous region that goes to Turkey’s Mediterranean port of Ceyhan.
The US said it had used penetrator munitions to hit Iranian anti-ship cruise missile sites near the Strait of Hormuz, the vital passage that President Donald Trump has been seeking to reopen. There was a further escalation in the war after Iran confirmed the death of Ali Larijani, secretary of Iran’s Supreme National Security Council and a key pillar of the country’s wartime leadership.
“The Larijani killing is a big deal, and may make Iran more desperate to disrupt oil flows,” said Aaron Stein, president of the Foreign Policy Research Institute. “Trump is obviously being pressured to escort tankers — so we’re in for the possibility of very tense US operations in ways I’m certain the Navy would like to avoid.”
The rerouting of Iraqi oil through Turkey will only partially relieve supply concerns. The OPEC member’s production has fallen to about 1.4 million barrels a day — about a third of levels before the closure of Hormuz.
Brent crude has rallied almost 70% this year, with the bulk of that surge following the initial US and Israeli attack against Iran late last month. With Tehran striking energy assets and choking off tanker traffic, the conflict has pushed up energy prices and spawned concerns about faster inflation.
The surge in prices — with US diesel costs topping $5 a gallon this week at the pump — will be scrutinized by central bankers around the world as they steer monetary policy. US Federal Reserve officials gather Wednesday to set interest rates, although no change is expected.
The oil market’s focus remains firmly on the chokepoint, which is effectively closed. Traffic conditions are now shaped by a political calculus, with Iran likely allowing just a handful of vessels to transit based on their affiliations, while deterring or blocking most others.
“With no end in sight to hostilities, shut-ins rising on a daily basis, and the Strait technically closed, we remain of the view that Brent is set to remain in a new, higher $95-to-$110 range,” said Robert Rennie, head of commodity research at Westpac Banking Corp. “Were we to see a major refinery plant hit or confirmation of additional mining of the strait, we would expect that range to extend higher by another $10-$20,” he added.
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