Somali pirates nab oil tankers as Hormuz closure pushes outlook for oil prices higher

(Originally published May 4 in “What in the World“) Is Iran the captain now?

Somali pirates on Saturday hijacked an oil tanker off the coast of Yemen and took it back to Somalia. It was the third such hijacking in recent weeks, and the second of an oil tanker. Because it took place so close to Yemen, some worry it could signal cooperation between the pirates and Yemen’s Iran-backed Houthi rebels.

Either way, oil prices are headed higher. Probably much higher. So deduces The Economist in its latest, 2,600-word litany of petro-woes facing the world as a consequence of the closure of the Strait of Hormuz. With Iranian supreme leader Ayatollah Mojtaba Khamenei boasting to retain control over the Strait and Trump warning his blockade could last for months, Brent crude futures climbed last week as high as $126 a barrel, the highest since 2022.

Oil prices ease somewhat after Trump on Sunday announced a new effort to free up shipping through the Strait, Project Freedom. The U.S. military said the operation would involve “coordinating” safe passage for, but not escorting, vessels through the Strait. Shortly after the announcement, a tanker in the Strait was hit by projectiles.

Save yourself the trouble and skip to the Economist’s final paragraph:

“…even in the most optimistic scenario, the world will continue to suffer a severe shortfall in supply for several more months. One way or another, fuel consumption will be rationed, whether by leaping prices or outright shortages. The energy shock of the past two months is bound to get bigger before it goes away.”

You don’t say. Despite efforts to route Gulf oil exports around the Strait, exports of crude are sharply diminished. Stockpiles of oil, both in reserves and on the high seas, are rapidly dwindling, as are inventories of refined fuels like diesel and jet-fuel. This is all likely to result in an even more severe shortage of supply in weeks that is likely to result not only in spiking prices, but further closures of filling stations and cancellations of commercial flights.

And here’s the situation in a few months or so once shale producers gear up but floating stockpiles get used up…

That obviously doesn’t include the ongoing draw-downs of nations’ strategic reserves and other stockpiles, which will gradually ebb, or any potential destruction of production if the war should heat back up and Iran resume its attacks on Gulf oil and gas fields.

The question is how long oil prices are likely to keep rising and how long they’ll stay high. Despite record U.S. oil exports, big oil companies don’t believe the spike is likely to last long enough to justify new investment in drill, baby, drilling. So, they’re, not, baby, not. In fact, there are fewer U.S. oil rigs operating now than before Trump and Israel attacked Iran. And the U.S. Energy Dept. believes U.S. oil production could actually drop this year.

OPEC Plus, now UAE-free, said Sunday it would boost production by 188,000 barrels a day. But the move is a largely symbolic gesture, especially considering that most of the oil the group is already pumping is bottled up in the Gulf until the Strait of Hormuz is opened.