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.
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“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.
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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.”
For now, oil trading well below $200 a barrel, a level many analysts initially feared, has left Trump wiggle room in negotiations with Iran, even as he repeatedly insists a peace deal is within reach. But a renewed and sustained price spike would add more pressure on the White House to strike a deal quickly to stem a hit to the global economy.
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.”
