What the continuing Middle East conflict means for transportation supply chain costs | Advisor Pulse

What happened between Iran and Israel?

Following an April 1 Israeli strike on the Iranian embassy in Damascus, Syria, matters have continued to shift and escalate in the Middle East. In response to the strike, on April 13 and 14, Iran directed a barrage of missiles and drones to fire on Israel, the majority of which were effectively destroyed by Israel and additional allies (U.S., UK, Jordan, and Saudi Arabia). Iranian officials stated the matter should be considered settled, but on April 18, Israel retaliated with missiles and drones directed at central Iran, near Isfahan, where a military base and nuclear sites are located. Israel has been careful to suggest the strike was a calibrated, proportionate attack in response to Iran’s strike, and Iranian officials also seem to be matching this language. It remains to be seen how the conflict continues to evolve, given the multifaceted nature of the issue.

These events not only have a significant societal impact but come with consequences for transportation supply chain costs.

Implications of Middle East conflict on transportation supply chains

Transportation energy costs

• Oil price volatility is growing in response to each subsequent attack and the escalation of these attacks will push prices higher.
• On Friday, Brent crude oil prices topped $90 per barrel before settling near $87, while WTI crude oil prices were over $85 per barrel before settling near $83 per barrel.
• Crude oil prices account for about 50% of the final cost of a gallon of diesel fuel. Therefore, an increase of $1 per barrel in the cost of crude oil equates to about a 2.4 cent per gallon increase in the cost of a gallon of diesel fuel, holding all else constant.
• WTI crude oil is about 8% higher than last April's average price per barrel, see chart below.

• Iranian oil sanctions were added to a U.S. House of Representatives Bill that may be voted on this weekend, April 20-21. While U.S. energy sanctions on foreign adversaries have resulted in mixed responses, the passage of this bill could create upward price pressure for crude oil, with high end estimates increasing by $8/barrel. Iran produces more than 3 million barrels of oil per day, which is more than 3% of global supply.

Supply chain costs

The Israel-Iran conflict will prolong vessels diverting from the Red Sea and Suez Canal. Events through the month of April increase the chance that regional resolutions will not be reached in the near term and supply chains will be forced into alternative routing through 2024. This will continue to elevate transportation costs due to tighter carrier capacity, higher fuel consumption, additional accessorial costs, and higher costs related to the emissions intensity of freight.

Our diesel price outlook

We are maintaining our diesel price forecast published in our April North American Advisor. We continue to expect that in 2024 the national diesel price average will be about $3.55 per gallon. Our next forecast will be released on Thursday, May 2.

Our forecast continues to project diesel prices will remain rangebound this spring before climbing through summer and into autumn because of increasing Q2-Q3 crude oil demand during North America’s summer driving season. The premium for diesel has decreased as of late because of weak demand across major global economies and will offset some of the price pressure on crude oil.

• According to the EIA, U.S. diesel demand is at its lowest level since 2016.
• Demand for diesel in Europe’s largest economies is down year-over-year.
• Thus far in 2024, China has seen a rise in diesel exports because of weak domestic demand.

Fundamentals, such as global economic growth, do not suggest crude oil prices can persist above $100/barrel without further supply side shocks such as direct attacks on crude oil and refined product infrastructure.

• Despite the U.S. Strategic Petroleum Reserve being at a significantly lower level than two years ago, there is less tightness in crude oil and diesel supply than there was at the onset of the Russia-Ukraine War, reducing the chance of similar price spikes without a significant escalation of conflict in the Middle East.

For more information on the Middle East conflict or other events that are impacting your transportation network, please contact your Director of Client Partnerships directly or the Breakthrough Team with any questions.