“The oil market pared some of its initial gains yesterday, with Brent settling 7.26 percent higher on the day after initially trading as much as 13.6 percent higher. The market continues to digest the risk of escalation in the Middle East. While there are concerns about oil flows through the Strait of Hormuz, a greater risk to the market would be Iran targeting additional energy infrastructure in the region. This could lead to more prolonged outages. Oil price movements have been fairly modest, given the amount of supply at risk and uncertainty about how long disruptions could persist. Part of the explanation: the market had already been pricing in a fairly large risk premium in the lead-up to.”

“Also, the market appears to be pricing in a relatively short-lived disruption to oil flows through the Strait of Hormuz, which the large surplus markets expect this year should be able to absorb. Clearly, supply disruptions leave significant tightness in the prompt market, as reflected in timespreads. The 12-month ICE Brent is surging from less than US$5/bbl to a little over US$9.50/bbl backwardation.”

“The May/Jun spread surged towards a US$1.60/bbl backwardation. Secretary of State Marco Rubio said that the US will announce plans on Tuesday to mitigate higher energy costs. At the same time, though, there have been reports that the US has no immediate plan to release oil from its strategic petroleum reserve. The longer the disruptions last, the more likely we are to see coordinated emergency releases from several countries,” says a Tuesday note from Dutch finance house ING.