Oil has taken off like a rocket as Israel strikes Iranian targets in Syria in response to rocket fire overnight. Israel says it targeted Iran’s military infrastructure in Syria, in response to an Iranian rocket attack on the occupied Golan Heights. This comes as Iran lashes out in every direction in response to the U.S. backing out of the Iranian nuclear accord. This backdrop of increasingly high tensions in the Middle East are even more supportive as U.S. oil inventory shows big drops in supply against robust and near record-breaking demand.

The Energy Information Administration (EIA) reported that U.S. crude supply fell by 2.197 million barrels last week. The drop in crude supply came as we saw a big drop in oil imports that fell by 1.22 million barrels a day last week, even as U.S. refiners slowed for more seasonal maintenance. The EIA reported that crude oil refineries operated at 90.4% of capacity running only 16.5 million barrels of oil per day.

That hurt gasoline production that fell to a still respectable 9.9 million barrels a day as gas demand was at a seasonal 9.97 million barrels of gasoline per day. Gasoline will continue to rise in the coming weeks, so refiners are going to come out of maintenance to keep up.

Yet they can’t focus just on gasoline. Distillates like diesel and jet fuel on hand are at historically low levels. The EIA reported that distillate fuel inventories fell by 3.8 million barrels last week putting supply in the lower half of the average range for this time of year.

U.S. crude oil exports fell by 271,000 barrels a day last week, and U.S. production rose by 84,000 barrels a day to 10.7 million barrels. U.S. Crude exports averaged 1.88 million barrels a day last week and have a daily average for the year of 1.64 million barrels a day, a 118% increase over the year-ago export total.

 So, the U.S. market is tight and the tension surrounding Iran and Israel will add to the oil risk premium. The larger issues of underinvestment in recent years means there is not a lot of spare production capacity left around the globe.

The International Energy Agency is also raising the alarm but says that they will come to the rescue. In a press release they said that “In recent months, oil market dynamics have been shaped by strong growth in demand, compliance by countries party to the Vienna agreement to cut output, and the crisis in Venezuela, leading to tighter overall market conditions. The restoration of sanctions on Iran, which exports 2.5 million barrels of oil a day and is the world’s fifth-largest exporter, may have implications for the market balance. The International Energy Agency, whose mandate is to support and safeguard global energy security, is monitoring the situation very closely. As ever, the IEA stands ready to act if necessary to ensure markets remain well supplied.”

But will Saudi Arabia act? The Kingdom wants $80 a barrel for oil. The FT reported that  Saudi Arabia will not act unilaterally to increase oil supplies following renewed U.S. sanctions on Iran’s energy industry, a Gulf source familiar with Riyadh’s thinking said on Wednesday, with any rise in output to be coordinated with Russia and other producers. The comments, which came as Brent oil crested $77 a barrel for the first time since 2014 on fears of a drop in Iranian exports, are a signal the OPEC kingpin is not willing to turn its back on a growing energy alliance with Russia, with whom it has worked with since early 2017 to manage output and help prices recover. “Any action will be taken in coordination with other producers,” the person said, adding that Saudi Arabia was already in talks with Russia and other producers including the UAE.

We should not be shocked that we are at this point in the oil market. Growing global demand and tightening supply only make prices go higher. Shale oil can’t cover growing demand and disruptions of supply, but thank goodness they are producing what they are or the global economy might be in a heap of trouble right now.