$180 Oil Prices Imminent? Saudi Arabia Warns: Crisis to Last Until Late April, Oil Prices Will Break Historic Highs

TradingKey - The continuous escalation of geopolitical conflicts in the Middle East is pushing global energy markets toward their most severe test in nearly 20 years.

The Wall Street Journal reports that Saudi Arabian officials estimate international oil prices could breach the $180 per barrel mark if the current energy supply disruptions persist until late April.

Saudi Arabia is deeply concerned, believing that ultra-high oil prices will not only prompt global consumers to permanently and significantly cut oil consumption but could even trigger a global recession, thereby fundamentally suppressing oil demand.

Although the U.S.-Iran conflict has entered its third week, there are no signs of the hostilities easing. Since the start of the year, the international benchmark Brent crude price has surged 80%, breaching the $110 per barrel mark again after Iran vowed retaliation and took a series of military actions.

Supply Chain Crisis

The Strait of Hormuz, a "choke point" for global oil transportation, carries 20% of the world's oil shipping capacity. Since the Islamic Revolutionary Guard Corps threatened to attack all vessels in transit, major global shipping companies have suspended routes through the strait, directly leading to a supply gap of tens of millions of barrels of crude oil.

Saudi energy officials revealed that the price of Saudi Light crude sold to Asia via Red Sea ports has climbed to $125 per barrel. As pre-war reserves are gradually depleted, spot prices are expected to approach the $138-$140 range next week.

"Current market reactions indicate that investors no longer believe this crisis will end by late March," noted Rebecca Babin, senior energy trader at CIBC Private Wealth Management, where "end" specifically refers to the termination of hostilities. "I don't think it's a pipe dream for oil to touch $150 within the next month... and if the timeline extends to June, it could even break the $180 mark."

Analysts at energy consultancy Wood Mackenzie stated, "It is not impossible for oil prices to reach $200 per barrel by 2026."

Bob McNally, a former White House energy advisor, also warned that oil prices will continue to rise unless the U.S. and Israel reach a ceasefire agreement with Iran, or the U.S. can effectively weaken Iran's ability to blockade the strait.

However, he emphasized that neither scenario is likely in the near term—Iran is clearly not ready for a ceasefire, and U.S. strikes on Iranian military facilities would take weeks to be effective.

McNally said, "Oil prices will keep climbing until they cause pain, a pain sufficient to slow economic growth and dissipate demand, and then we will face a free-fall decline."

Since the outbreak of the conflict, the market has consistently worried about the impact of rising oil prices, but McNally believes that even at $100 per barrel, crude oil is far from hitting the economy's "pain threshold."

He further stated that the upward trend in oil prices could only be contained if one of two scenarios occurs, though neither currently seems realistically possible:

First, the U.S., Israel, and Iran reach a ceasefire agreement. This would be the most direct way to end the oil price surge; once an agreement is reached, crude oil and other energy products could again be transported through the Strait of Hormuz. However, McNally pointed out, "The problem is that a ceasefire requires the consent of both parties, and Iran is clearly not ready."

Second, the U.S. successfully weakens Iran's ability to threaten oil shipping. Specifically, the U.S. could achieve this by striking Iranian anti-ship cruise missile sites, drone bases, and artillery, but this process could take weeks. McNally also mentioned that the U.S. could theoretically send escorts to assist tankers through the strait to increase supply, but this is currently unrealistic. "Escort forces are usually sent only after several weeks of strikes against Iran; they wouldn't be put on the front lines where they could be attacked by Iranian facilities that haven't been destroyed yet."

Hidden Concerns Behind High Oil Prices

For Saudi Arabia, which is heavily dependent on oil revenue, high oil prices may seem like a windfall but actually hide significant risks. Saudi energy officials stated that if oil prices remain above $150 for an extended period, it will not only prompt global consumers to permanently cut oil consumption but could even trigger a global recession, ultimately dealing a fundamental blow to oil demand.

"Saudi Arabia generally does not want oil prices to rise too quickly because it leads to long-term market instability," noted Umer Karim, a Saudi foreign policy and geopolitics analyst at the King Faisal Center for Research and Islamic Studies. For Saudi Arabia, the ideal state is a moderate rise in oil prices while maintaining a stable market share.

Currently, Saudi Aramco is modeling market impacts under extreme scenarios. If oil prices break $180, oil import costs for Europe, Japan, and South Korea will soar, pushing up inflation and interest rates, and ultimately leading to slower economic growth and shrinking demand.

Analysts warn that if domestic energy prices in the U.S. continue to surge, the negative impact could eventually blow back on the U.S. itself—even though it is the world's largest oil producer.

Federal Reserve Chair Jerome Powell said Wednesday that persistently high energy costs would further exacerbate upward pressure on prices and hurt economic growth. He noted that although the U.S. has become a major energy exporter in recent years, "on a net basis, this oil price shock will still exert downward pressure on consumer spending and the labor market while pushing up inflation."

"Typically, it's only when Brent crude hits the $150 mark that people really stop what they're doing and take a hard look at the economic math," Babin said.

Analysts point out that if oil prices reach this level, Americans might turn to public transportation, work from home, or rethink summer vacation plans; manufacturers might slow production to avoid losses due to high operating costs.

For the vast majority of consumers, the terminal retail price at gas stations is what matters most. James West of Melius Research observed that consumer demand often begins to decline once retail gasoline prices exceed $3.50 per gallon.

Today, high prices have become a reality. According to AAA data, the average retail price of gasoline in the U.S. rose to $3.88 per gallon on Thursday, compared with just $2.93 a month ago. Drivers in Arizona, New Mexico, and Colorado are feeling the "price shock" particularly acutely.

Diesel prices have surged even more rapidly, breaking $5.10 per gallon. This has dealt a heavy blow to businesses dependent on diesel transport—from agricultural products and semiconductors to steel, the national distribution of all types of goods relies on diesel.

Changes in the Energy Trade Landscape

Against the backdrop of the global energy supply crisis triggered by the blockade of the Strait of Hormuz, the U.S. announced a temporary lifting of its ban on Russian oil.

India has become the protagonist of this buying spree. Within a week of the ban being lifted, Indian refiners purchased approximately 30 million barrels of Russian oil, and daily purchases have now nearly doubled to 1.8 million barrels.

According to data from Vortexa Ltd., at least seven Russian oil tankers originally bound for other destinations were diverted to India mid-voyage. India had previously cut Russian oil imports at the start of the year due to trade negotiations with the U.S., but as the Strait of Hormuz crisis persisted, it quickly adjusted its energy strategy, purchasing large quantities of Russian Urals and Far East crude, scheduled for delivery in March and April.

In addition to India, Southeast Asian countries such as Thailand, the Philippines, and Indonesia have also expressed interest in importing oil from Russia.

Prices for Russian Far East crude have rebounded sharply due to the buying craze, with May shipment prices expected to be about $10 per barrel higher than Brent crude, a stark contrast to the previous deep discounts on Russian oil.

Muyu Xu, senior crude oil analyst at Kpler, noted that spot supply of Russian crude is tightening and floating storage has dropped significantly. Most of the crude for May may have already been booked, and prices for Russian oil are expected to rise further as buyers from Japan and South Korea return.

Buying activity by Asian countries is reshaping the global energy trade landscape. Previously, due to U.S. sanctions, Russian crude was mainly sold at a discount to a few buyers, but now, Russian oil has become a key choice for Asian nations to cope with the energy crisis.

This has not only eased supply pressures in Asia but also brought valuable foreign exchange revenue to Russia, with its crude oil exports in March expected to reach 3.9 million barrels per day, a 22% increase from February.