Wait, shouldn't oil cost more?
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Illustration: Aïda Amer/Axios
The Strait of Hormuz has been closed for 10 weeks now — a once unthinkable shock to the world economy — yet global oil prices aren't nearly as high as many people had expected.
Why it matters: The relatively restrained price movement helps explain why the global economy is holding up so far.
How it works: The U.S. and China are playing a huge role in keeping costs down, says an intriguing note out yesterday from Morgan Stanley commodities strategists in London.
Where it stands: Since the start of the war, the world is nearing a loss of 1 billion barrels of oil from the Middle East, per the analysis.
- They estimate a decline of 12.3 million barrels per day from seven countries.
By the numbers: "That this is the largest oil supply disruption in the history of the oil market is neither an exaggeration nor controversial," they write.
- Yes, a barrel of Brent crude is up more than 40%, sitting just above $100.
- But it's far off the high of just under $140 seen in 2022, when prices rose amid fears that a far smaller amount of oil out of Russia would be drained from the market.
- Oil traded around $100 from 2011-2014 — adjusted for inflation that makes today's prices positively cheap.
The intrigue: Then there is the role played by the world's two biggest economies.
- The U.S. has sharply increased its oil exports — by about 3.8 million barrels of crude and other petroleum products a day.
- China has cut its imports by about 5.5 million barrels a day.
- Together, that means the two countries have absorbed about two-thirds of the daily shortfall of 12 million barrels in the market.
Reality check: America's export surge is being fueled by inventories — including strategic reserves — rather than higher oil production this year. That means it's unclear how long the U.S. can keep this up.
What we're watching: China's side of the equation is harder to track, but it may be better positioned.
- Morgan Stanley estimates that even if China is drawing inventories down by several million barrels a day, it could sustain the current pace "for months, possibly the balance of the year."
Zoom in: There are other factors keeping a lid on prices for now.
- First, prices were relatively low coming into the war — and inventories were ample.
- Second, there's optimism. The energy futures market has been pricing in the strait's reopening since this whole thing started.
- "Markets never lost faith that very large consumer price hikes would prompt a U.S. policy shift," Goldman Sachs chief economist Jan Hatzius wrote in a note yesterday.
Zoom out: Economic activity is holding up better than Goldman thought it would at the outset of the war.
- The bank now says that the odds of a U.S. recession in the next month are 25%, down from its previous 30% call.
- Still, the recession odds are a bit higher than where they were before the war.
- Goldman says it's worried about consumer spending as tax refund money runs out, and the savings rate is low (as Axios explained Monday).
Between the lines: Perversely, the longer oil prices stay muted, there is limited pressure on the White House to agree to a deal — and Iran will want to drag it out further to ramp up economic pain, Robin Mills writes in The National.
- Ultimately, that could mean that in a few weeks or months, we'll be asking why prices are so high, he says.
