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When\u00a0oil\u00a0jumped above $90 a barrel just days ago, military\u00a0tensions<\/a>\u00a0between Israel and Iran were the immediate trigger. But the rally\u2019s foundations went deeper \u2014 to global supply shocks that are intensifying fears of a commodity-driven inflation resurgence.<\/p>\n A recent move by Mexico to slash its crude exports is compounding a global squeeze, prompting refiners in the US \u2014 the world\u2019s biggest oil producer \u2014 to consume more domestic barrels. American sanctions have\u00a0stranded<\/a>\u00a0Russian cargoes at sea, with\u00a0Venezuelan<\/a>\u00a0supply a potential next target. Houthi rebel attacks on tankers in the Red Sea<\/a> have delayed crude shipments. And despite the turmoil,\u00a0OPEC\u00a0<\/a>and its allies are sticking with their production cuts.<\/p>\n Read more:\u00a0Mexico to Halt Some Oil Exports, Squeezing Global Market<\/a><\/p>\n It all adds up to a magnitude of supply disruption that has taken traders by surprise. The crunch is turbocharging an oil rally ahead of the US summer driving season, threatening to push Brent crude, the global benchmark, to\u00a0$100<\/a>\u00a0for the first time in almost two years. That\u2019s amplifying the inflation concerns that are clouding US President\u00a0Joe Biden\u2019s reelection chances and complicating central banks\u2019 rate-cut deliberations.<\/p>\n For oil, \u201cthe bigger driver right now is on the supply side,\u201d\u00a0Amrita Sen, founder and director of research at Energy Aspects Ltd., said in a Bloomberg Television interview. \u201cYou have seen quite a few pockets of supply weakness, and demand overall on a global basis is healthy.\u201d<\/p>\n Oil shipments from Mexico, a major supplier in the Americas,\u00a0slid<\/a>\u00a035% last month to their lowest since 2019 as President\u00a0Andres Manuel Lopez Obrador\u00a0tries to make good on promises to wean the country off costly fuel imports. The country\u2019s exports so-called sour crude \u2014 the heavy, dense kind that many refineries are designed to process \u2014 now stand to shrink even further as state-controlled oil company Pemex<\/a> has canceled some supply contracts to foreign refiners, Bloomberg News reported last week.<\/p>\n That decision has roiled oil markets around the world. Mars Blend, a medium-density sour crude from the US Gulf Coast, has in recent days risen to a multi-year premium over lighter West Texas Intermediate, the national benchmark. Mars usually trades at a discount to WTI. Brent crude hit $90 a barrel on Thursday, the highest since October, and extended gains on Friday. JPMorgan Chase<\/a> & Co. has said it could hit $100 by August or September.<\/p>\n Canadian\u00a0Cold Lake\u00a0oil priced at the Gulf Coast traded at the narrowest discount to WTI in almost a year. Key indicators for Middle Eastern medium-sour crude, such as Oman and Dubai contracts, are rallying too.<\/p>\n Read more:\u00a0Oil Producers Turn the Screws as Market Tightens: Energy Daily<\/a><\/p>\n Before Mexico\u2019s move, there was a sequence of supply disruptions both large and small. In January, a deep freeze ate away at crude output and inventories in the US at a time when they would normally grow, keeping\u00a0stockpiles\u00a0below seasonal averages through late March.<\/p>\n Mexico, the US, Qatar and Iraq cut their combined oil flows by more than 1 million barrels a day in March, tanker tracking data compiled by Bloomberg show. Baghdad has pledged to limit output to make up for non-compliance with prior pledges to the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+.<\/p>\n Adding to the tightness, OPEC member the United Arab Emirates curbed shipments of Upper Zakum, a medium-sour oil, by 41% in March compared with last year\u2019s average, according to data from maritime intelligence firm Kpler. The state oil company is diverting more supplies of that crude to its own refinery, traders said. Though the cuts were expected and\u00a0Abu Dhabi National Oil Co.\u00a0is offering buyers another type of crude as a substitute, the decline in Upper Zakum exports is contributing to higher regional prices amid the broader OPEC+ curtailment.<\/p>\n Crude markets in Europe, meanwhile, were pressured higher by the Houthi attacks in the Red Sea, which sent\u00a0<\/strong>millions of barrels of crude on a detour around Africa, delaying some supplies for weeks. Disruptions to a key North Sea pipeline, unrest in Libya and a damaged pipe in South Sudan also contributed to the rally, while US sanctions have\u00a0deprived<\/a>\u00a0Russia of tankers that previously transported its oil to buyers including India.<\/p>\n The supply pinch could become even more acute in the weeks ahead. With President\u00a0Nicolas Maduro\u00a0showing no sign of heeding promises to move toward free and fair elections, the Biden administration could reimpose sanctions this month.<\/p>\n The market for heavier, dirtier oil \u201chas been rangebound to bearish for some time now, but this tightness in sour markets and the outlook for the summer driving season in the US suggest the market is turning a corner,\u201d said Samantha Hartke, an analyst with analytics firm Sparta Commodities.<\/p>\n It\u2019s a stark contrast from just a few months ago, when oil plunged to multi-month lows as US production climbed and Russian seaborne crude exports ratcheted higher despite sanctions, which have since been expanded. The US Energy Information Administration, after\u00a0forecasting<\/a>\u00a0global inventories to remain unchanged this quarter, now predicts they\u2019ll fall by 900,000 barrels a day. That\u2019s the equivalent to the production from\u00a0Oman<\/a>.<\/p>\n The supply squeeze comes as demand is ramping up. US refiners are preparing to boost fuel production for the summer, when millions of Americans take to the roads and gasoline consumption peaks.\u00a0Gasoline stockpiles\u00a0on the populous East Coast are tightening and\u00a0manufacturing activity<\/a>\u00a0in the US and China is also signaling a boost in fuel use. In Asia, refining margins are around 50% higher than the five-year seasonal average, suggesting healthy demand.<\/p>\n Crude\u2019s rally has\u00a0snarled<\/a>\u00a0the Biden administration\u2019s plans to refill emergency US oil reserves, which reached a 40-year low following an unprecedented drawdown after Russia\u2019s invasion of Ukraine. It\u2019s also a political risk for Biden as prices for food and energy remain stubbornly high. Oil\u2019s advance threatens to push retail gasoline, now near a daily national average of $3.60 a gallon, toward $4, a key psychological level. That\u2019s contributing to concern that commodities will reverse the recent slowdown in consumer price gains.<\/p>\n Oil prices are now boosting US inflation after subtracting from it at the end of last year. That may be evident again in the March consumer price index due Wednesday, as the overall CPI is seen accelerating on an annual basis, while the core measure that excludes food and energy is expected to tick down. A Bloomberg index of key commodities has reached the highest level since November.<\/p>\n The crude price surge could ultimately force OPEC+ to dial back some production cuts, said\u00a0Vikas Dwivedi, a global oil and gas strategist for Macquarie Group. And oil substantially above $90 can lead to global demand destruction and ultimately lower prices, according to JPMorgan. But so far, there\u2019s little sign of that happening yet.<\/p>\n \u201cIt is a market on firm fundamental footing, no question. I think $100 oil is entirely real \u2014 it just requires a little more risk pricing on the true geopolitical risk,\u201d\u00a0Bob McNally, founder of consultant Rapidan Energy Group and a former White House adviser, said in a Bloomberg Television interview.<\/p>\n<\/div>\n\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n