It takes a village to delay an energy disaster
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With summer driving season here, let's revisit two big questions: why isn't the global oil crisis even worse, and how long until economic damage from the Iran war gets even more acute?
Why it matters: There's persistent risk of much higher prices and expanding shortages.
The big picture: Brent crude futures are under $100 per barrel despite the throttling of the Strait of Hormuz, which handles a fifth of the global oil trade.
- That's well below the high of around $120 they briefly hit in March and April, even as the war deprives the market of ever more oil.
- And prices for physical barrels, notably "dated Brent," are also well below the highs they hit earlier in the conflict.
How it works: Overlapping forces have eased the futures and physical markets, including...
🛏️ Global oil supply was well above demand before the war, and that soft pre-war market is cushioning the blow now.
- "Those large inventories have meant that the world has so far mostly avoided physical oil and product shortages," analysts with investment firm Macquarie said in a note Wednesday.
🇨🇳 China had built up massive stockpiles and has lowered its crude imports.
🇸🇦 Saudi Arabia has increased oil flows through its east-west pipeline that bypasses the strait, and the United Arab Emirates has also increased pipeline transit.
🤫 A limited number of ships are quietly getting through the strait.
📉 Refineries in Asia "preemptively" started processing less crude when the conflict started — meaning less oil was being used — even though shipments from the Middle East were still arriving, research and consulting firm Rapidan Energy Group points out in a note.
🔓 The U.S. has provided oil from strategic reserves and boosted exports, and other countries are also taking part in releases coordinated by the International Energy Agency.
📝 Many governments are implementing fuel savings measures like remote work, and high prices are also discouraging some travel already.
💬 President Trump's comments throughout the conflict, including recent suggestions that a deal is close, help "jawbone" down futures prices.
Reality check: These are band-aids until the strait truly opens, and Middle East countries that lowered production can revive it.
- As of mid-May, cumulative supply losses were north of 1 billion barrels, per the International Energy Agency.
"Every day the Strait of Hormuz is shut in, 11 million to 14 million bpd [barrels per day] of oil fails to make it to market, and barrels are taken out of storage someplace else to compensate," Robert Yawger of the investment firm Mizuho Securities USA said in a note Wednesday.
What we're watching: Markets are not perfectly transparent on changes in supply or consumption.
- But educated guesses on what's next are possible, and some of them look bleak.
- Macquarie estimates that the market will be "OK" for another month or two.
The bottom line: If the strait stays largely closed, eventually supply and demand will have to rebalance in the hardest way possible — via prices so high and supplies scarce enough that consumption must fall greatly.
- "[I]f the Strait is still closed on Labor Day, expect front-month Brent prices of $130 to $150. If the war continues into 2027, prices of ~$200 may be needed to balance supply and demand," Macquarie's note states.
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