Russell: What is not happening in Middle East crude oil supply matters more.

It can be useful to consider what isn't happening in the Middle East when tensions are rising.

On the crude oil markets, this means that we should focus on the fact there has not been a single barrel lost. All parties are interested in this situation.

Crude oil prices increased again during early Asian trade on Monday. Brent futures, the global benchmark, gained 2.1% and traded at $75.76 per barrel.

Brent crude oil rose to its highest level in almost five months on June 13 after Israel launched drone and air attacks that resulted in the deaths of several Iranian nuclear scientists, nuclear commanders and top nuclear scientists.

It's important to note that the physical oil market in the Middle East has a more measured reaction than the paper market.

On June 13, the price of Dubai swaps (a contract that is settled against the physical price of Dubai crude) rose by 5.8% to $71.03 per barrel.

Brent contracts have seen a $4.87 increase compared to the $3.86 gain for Dubai swaps.

The smaller gains for physical oil may be a sign traders and refiners have less concern about an interruption in supply than paper investors. Although physical oil prices were lower than those of paper, they still rose significantly. This is a response to an escalating conflict.

The key question for oil markets is whether or not the risk of an attack on Iran's crude export and production infrastructure and Iran blocking the Strait are real and imminent. The small channel that runs between the Persian Gulf, the Gulf of Oman and the Indian Ocean carries up to 20,000,000 barrels of oil per day.

There are few alternatives to the route used by OPEC member Saudi Arabia, Kuwait, Iraq, and Iran for their bulk crude and product exports.

Qatar, which is the second largest shipper in the world of super-chilled fuels, also uses this route to export its liquefied gas.

It is worth noting, however, that in the Middle East's past conflicts, the Strait of Hormuz has never been blocked. However, there have been cases where Iran has boarded tankers and detained them.

One could argue that Iran's best option is to continue to raise the price of oil by bringing up the concerns about shipping through the Strait of Hormuz. This will keep the market interested in the issue, and the premium on the oil.

HORMUZ RISKS

What would happen if Iran were to try and close the waterway by pursuing what might be called a nuclear option?

The conflict would be exacerbated if Iran and other countries were to stop exporting crude oil.

The United States could act to keep the waterway opened, while Iran would sacrifice any goodwill that it may have with its Gulf neighbours as well as China, which is the largest crude importer in the world and, in fact, the sole major buyer of Iran’s sanctioned petroleum.

China does not engage in loudspeaker diplomatic outreach, but it still makes its opinions known to all parties in the conflict. Beijing is keen to see an immediate de-escalation.

Although the United States tends to express its views publicly, they are sometimes confused by President Donald Trump’s tendency to speak off-the-cuff or contradict his own senior officials.

Washington's message is also clear: they will defend Israel and only intervene if Iran directly attacks U.S. personnel, interests or facilities.

Israel also restricted its attacks to domestic Iranian energy infrastructure, such as refineries and tanks for storage. This is a measure to make life harder for Iranians without harming crude production or exports.

It is important to note that in the past, even dramatic events have led to only limited disruptions in crude oil supply. Tensions will eventually subside.

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These are the views of a columnist, who is also an author.

(source: Reuters)