Tanks Full, Taps Closing: Hormuz Closure Becomes an Oil Production Crisis
Israel struck oil storage depots and refining facilities in Tehran for the first time late Saturday, including the Shahran depot on the capital's outskirts. It was still burning into Sunday morning, according to media reports. The IDF claimed the targets distribute fuel to military entities. This is a phase shift. Nine days into Operation Epic Fury, the targeting set has moved from military and political infrastructure to energy logistics. Iran's parliament speaker responded Sunday that oil prices will keep climbing as long as the war persists, perhaps implying Tehran too will now target energy infrastructure in neighboring countries.
The weekend's most operationally significant development, though, happened on the other side of the Gulf. Kuwait Petroleum Corporation confirmed Saturday it is cutting crude production and refining output, citing Iranian threats against Hormuz transit and storage at capacity.
The initial reduction to output was roughly 100 thousand b/d as of Saturday and is expected to have nearly tripled today, with more shut-ins likely. Kuwait’s production was 2.6 million b/d before the war started. ADNOC separately confirmed it is "managing offshore production levels to address storage requirements," which is Gulf diplo-speak for there’s nowhere left to put our oil. Iraq already cut 1.5 million b/d earlier this week. QatarEnergy declared force majeure on LNG nearly a week ago.
Filling storage and cutting production in the Middle East means oil stock draws in the rest of the world will now mount rapidly. All else equal, these draws will force cash oil prices higher, steepening backwardation in oil forward curves as consumers now compete more desperately for spot barrels.
This new phase already began on Friday. NYM WTI settled Friday at $90.90, up +$9.89 on the session (+12.2%) to cap a +35.6% weekly gain. This is the largest weekly move in this futures market’s history dating back to May 1983. ICE Brent closed at $92.69, +8.5% on the day and +28% on the week, for the biggest weekly advance since a bounce from near the COVID low in 2020.
Backwardation in the benchmark crude oil forward curves, as measured by the M1-M24 spreads, increased from 9.1% (Feb 27) to 40.3% (Mar 6) in WTI, 9.8% (Feb 27) to 33.3% (Mar 6) in Brent, and 9.2% (Feb 27) to 23.7% in Dubai.
Qatar's energy minister told the FT Friday that crude could hit $150/bbl within weeks if tankers remain locked out of the Strait. His assessment foots with our analysis of Friday’s trading in NYM crude oil options. By our calculations, they imply the upper end of the 95% confidence interval now sits just under $180 at the March 31 tenor and just under $200 at the June 30 tenor.
AAA reports the average U.S. pump price for regular grade gasoline was $3.45 per gallon as of Saturday (Mar 7), marking a gain of +47 cpg (+15.8%) since Feb 27. On Friday, wholesale cash prices for diesel reached $3.63 per gallon on the Buckeye pipeline and $3.53 per gallon on the Colonial pipeline. Those prices are now, respectively, +56% and +58% higher than a month ago.
Europe is getting hit harder: the region imports about 50% of its jet fuel through Hormuz. The spot price of jet fuel cargoes in Northwest Europe (CIF basis) jumped by more than +82% last week, from $831 to $1,517 per mt. Current price converts to the equivalent of $193 per barrel.
On Friday, CMX gold closed at $5,159 per oz, off its January high of $5,586 but well supported by safe-haven flows. CMX silver settled at $83.82 per oz. Both metals sold off modestly late in the week despite the war premium, partly on margin calls forcing liquidation across asset classes. We expect a bid in both gold and silver to pick up momentum again, but precious metals are now playing second fiddle to the oil complex.
Monday Mar 9 trading has already opened in Shanghai. The INE medium sour crude contract has leapt by 14%, in part catching up to Friday’s activity in London and New York. But we would note it is now fetching the equivalent of more than $109 per bbl.
At the Sunday night open for U.S. commodity futures in a few hours, WTI and oil products likely gap higher again. Every weekend headline has been escalatory: Tehran energy infrastructure targeted, Gulf production physically curtailed, Trump demanding unconditional surrender and floating ground troops, Iran's Assembly of Experts selecting a new supreme leader whose name has not been disclosed for his own protection. The Houthis have pledged to re-enter the fight.
None of these developments points toward de-escalation or Hormuz reopening within an imminent time frame. The question now is the magnitude of the consequences. A $3 to $5 gap higher for WTI is our base case tonight, though we expect Brent soon to cross $100, which will generate headlines.
Separately, market sentiment appears to be underestimating the permanence of forced shut-ins.
When any producer shuts in a well unexpectedly because storage is full, the well does not just turn back on at full rate. Forced closures under pressure cause damage that can permanently reduce recovery rates. The Society of Petroleum Engineers documented this pattern extensively after the 1991 Gulf War, when some Kuwaiti fields lost 15% or more of long-term production capacity.
Iraq, Kuwait, and soon potentially Saudi Arabia and the UAE are now shutting wells with the same forced haste and probably suboptimal mitigating protocols. U.S. Administration officials and investors seem to regard Hormuz as a temporary blockage, a valve that closes and reopens. But every day the strait stays shut, a portion of the supply that comes back online will be structurally smaller than what went offline. That delta is not in the curve yet.
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