For decades, oil traders, executives and analysts warned that closing the Strait of Hormuz would be a global economic catastrophe.
It’s now been more than three months since the waterway was effectively blocked, creating the worst supply shock in modern history. But a slew of workarounds is keeping crude oil below $100 a barrel, defying many of the industry’s grimmest forecasts for prices as high as $200.
A combination of record US exports, a sharp and unexpected slowdown in Chinese demand and a steady trickle of crude still finding its way through the strait has helped absorb much of the shock from the loss of more than 10 million barrels a day of Middle Eastern supply. A pre-war surplus has also eased the blow.
“People thought it was going to be a lot worse,” President Donald Trump said Friday. “Today I looked at $96 a barrel, people thought that was going to be $300 a barrel.”
All eyes now are on how long those buffers can hold, while the question of when flows might resume through the strait, and where oil prices are headed, have become the biggest wild cards for the global economy.
One of the biggest surprises for the oil market has been China, the world’s largest importer. It slashed inbound shipments by almost 40% in May compared to last year’s average, according to Vortexa Ltd. The reduction is enough to offset anywhere between a third and a fifth of the barrels lost to the war, depending on the estimates used.
At the same time, the US has emerged as the world’s most important swing supplier since launching strikes on Iran in late February. American crude and fuel exports in May were more than 2 million barrels a day higher than the average for all of last year.
Other emergency measures have also eased the strain. Governments around the globe coordinated a historic release of strategic reserves, while Gulf producers rerouted shipments through alternative export routes. Some tankers continued moving cargoes via the strait despite the risks, using increasingly opaque methods to avoid military threats.
“Over three months into this conflict, the world has proven surprisingly resilient,” Maria Angelicoussis, chief executive officer of Angelicoussis Group, the largest Greek shipowner by number of vessels on the water, said in rare public remarks this week. “Commodity prices are up by 50% or 60%, Asian LNG prices by 90%, but they’re not at the sky-high levels that at least I would have personally expected.”
Global inventories are drawing down at a record pace, leaving the market increasingly vulnerable to fresh disruptions. With spare supplies dwindling, even relatively small outages could trigger violent price spikes.
“Each week that goes by, the system is tightening by 70 to 80 million barrels. You can’t do that forever,” said Greg Sharenow, who helps manage nearly $24 billion as head of Pacific Investment Management Co.’s commodity portfolio investment team. “Over the course of the next few months, generously speaking, you’ll really be staring at a system that could be lacking flexibility because the buffers have been really depleted.”
US oil production has boomed to record highs in recent years thanks to the shale revolution that began over a decade ago, turning the country into a net exporter of crude and refined product.
The abundance of domestic energy has allowed President Trump to make geopolitical decisions and moves that would’ve once been considered unthinkable — not just starting a war against Iran, but also the seizure of Venezuelan President Nicolas Maduro.
Now, however, the limits of some of the workarounds are coming into focus. Overall oil inventories in the US shrank to the lowest level in more than two decades last week. Emergency reserves have little oil to spare and fuel stockpiles are facing critical lows as peak summer demand months approach.
“We’re not capable of sustaining these exports,” said Pimco’s Sharenow, adding that inventories at the critical storage hub in Cushing, Oklahoma, are approaching operational lows.
The Trump administration has made other strategic moves to help stabilize markets. Notable among those has been a waiver for some sanctioned Russian oil, making it easier for Indian processors, in particular, to boost purchases.
Many traders see China’s eventual return to pre-Iran war oil purchasing rates as the key to predicting when oil prices finally lurch higher.
The country’s refinery throughput in May and June is seen languishing at around 13 million barrels a day, a monthly run rate last seen during the early stages of the pandemic in 2020, according to estimates by Kpler and Energy Aspects Ltd. Throughput averaged 14.8 million barrels a day last year.
There’s also been a trickle of vessels willing to transit the strait, either as part of government-to-government deals, risk-taking enterprise or, more recently, with help from the US.
Still, transits have plunged to two or three every day compared to nearly 100 prior to the conflict, according to shipping tracking data. Visibility on commercial shipping through the waterway is limited by ongoing GPS jamming and tracking disruptions.
“As a bare minimum of what counts as a ‘meaningful recovery’ I think that we would need to see a full week averaging 20 ships per day — and that’s not realistic until there is a durable US-Iran settlement, which keeps getting pushed out,” said Pavel Molchanov, an analyst at Raymond James.
Another factor keeping a lid on prices has been Trump’s relentless jawboning, making it hard for even the most bullish traders to hold long positions for prolonged periods of time.
Open interest in Brent crude futures is the lowest since August as elevated market volatility forces traders to roll back risk exposure. Steep price drops on the prospect of peace have pushed many oil bulls to the sidelines, leaving them to hold small positions for very limited periods of time, several traders said.
The lack of risk-taking has helped keep a lid on financial flows, while supply levers have averted the worst hit to the market. The question now, is whether that can last without a peace deal.
“It’s basically this anticipation that there’s a solution just around the corner,” Tom Baker, head of Vitol Bahrain, a unit of the world’s top independent oil trader, said at a conference this week. But no matter how quickly production is restored, “you’re still left with a hole — whatever you want to call it — a billion barrels of oil that is missing.”
