The Strait of Hormuz has been blocked for over three months, severing more than 10 million barrels per day of Middle Eastern crude supply and creating the most severe oil supply shock in modern history. However, Brent crude has retreated from its record highs above $140 at the start of the conflict to below $100, with the industry's earlier pessimistic forecasts of $200 per barrel failing to materialize.
"People thought it would be much worse," the U.S. President said on Friday. "Today I see $96 a barrel; people thought it would go to $300."
The conflict has now lasted nearly one hundred days. On the 5th, the U.S. President declared he had "completely destroyed" Iranian military capabilities. Almost immediately, U.S. forces launched airstrikes on parts of Iran again on the 6th, to which Iran responded with missile attacks on a U.S. airbase in Kuwait and the Fifth Fleet facilities in Bahrain.
Amid intermittent fighting and diplomatic talks, a series of emergency measures are enabling the global oil market to absorb this supply shock with unexpected resilience.
The CEO of the world's largest Greek shipowner, Angelicoussis Group, stated, "After more than three months of conflict, the world is showing surprising resilience. Commodity prices have risen 50% to 60%, and Asian LNG prices have risen 90%, but they have not reached the sky-high levels that at least I personally expected."
Three Forces Restraining Oil Prices
On the demand side, as the world's largest crude oil importer, China's May crude imports plummeted by nearly 40% compared to last year's average (Vortexa data), a decline substantial enough to offset between one-third and one-fifth of the supply lost due to the war. The reasons behind this include: China has halted the recent continuous growth in its strategic petroleum reserve stockpiling, coal-based chemical production is substituting for some petrochemical capacity, and booming electric vehicle sales are suppressing gasoline consumption.
According to estimates by Kpler and Energy Aspects, China's refinery throughput for May-June fell to around 13 million barrels per day—the last time such operating levels were seen was in early 2020, compared to an average of 14.8 million barrels per day last year.
The Head of Commodities Strategy at ING noted, "China's significant retreat from the crude market has played a key role in the global market rebalancing, helping to keep a lid on prices."
While demand is contracting, the supply side is also demonstrating unexpected flexibility—primarily influenced by the United States.
Thanks to the shale revolution launched over a decade ago, the U.S. is now a net exporter of crude oil and refined products, and its abundant domestic energy resources are precisely the confidence behind the U.S. administration's decision to engage in the conflict. Since the war began in late February, the U.S. has further played the role of the world's most crucial swing supplier, with U.S. crude and fuel exports in May exceeding last year's average by over 2 million barrels per day.
The U.S. administration committed to releasing 172 million barrels from the Strategic Petroleum Reserve (SPR), with the pace of execution exceeding expectations—in one week last month, SPR releases reached 1.4 million barrels per day, with nearly half shipped to Europe and other overseas destinations.
Washington also played another card: granting exemptions to some sanctions on Russian crude, making it easier for India to increase purchases. In May, Russia's average exports to India, the world's third-largest crude importer, reached 1.76 million barrels per day, a 63% increase from February.
Alternative export routes provided additional buffers. Saudi Arabia transported crude to the Red Sea via the East-West pipeline, and the UAE moved crude to the port of Fujairah outside the Persian Gulf via pipeline. Governments also coordinated a historic joint release of strategic reserves, and pre-war market oversupply absorbed some of the shock.
Although the number of commercial vessels transiting the Strait has plummeted from nearly 100 per day before the conflict to 2-3, a small number of ships still pass through via government-to-government deals or increasingly covert methods. According to an official familiar with U.S. Central Command operations, nearly 1,000 commercial vessels have still entered and exited the Strait over the past two months.
Buffers Are Depleting
These emergency measures have stabilized oil prices, but they themselves are being consumed.
Global oil inventories are declining at a record pace. The head of the commodities portfolio at Pimco, who manages nearly $24 billion in assets, issued a blunt warning: "Every week, the system tightens by 70 to 80 million barrels. This cannot go on forever. Within the next few months—to be generous—you will face a system that may lose its flexibility because the buffers have been severely depleted."
The U.S. domestic situation is also tightening. Last week, total U.S. petroleum inventories fell to their lowest level in over 20 years, with stocks at the key storage hub Cushing approaching operational minimums, strategic reserves nearly depleted, and fuel inventories at critical lows as the summer driving season approaches. Domestic refineries are running at overcapacity to meet demand, competing with exports for crude, which has pushed up the premium of U.S. crude over Middle Eastern crude in Asia.
"We do not have the ability to sustain these export levels," the Pimco executive said.
Will Prices Soar Next?
The U.S. President's continuous calls for peace talks have, to some extent, capped oil prices. Open interest in Brent crude futures has fallen to its lowest level since last August, with severe market volatility forcing traders to reduce risk exposure. Price plunges triggered by peace expectations have also pushed many long-position traders to the sidelines, operating only with small positions and short timeframes.
However, the prospects for talks are unclear. An analyst at Raymond James pointed out that the "minimum threshold" for resuming Strait shipping is at least 20 vessels per day for a consecutive week—"this is unrealistic before a lasting U.S.-Iran reconciliation, and the timing of such a reconciliation keeps being pushed back."
An article in Time magazine highlighted an awkward reality: even if negotiations succeed, the best outcome would be merely the reopening of the freely flowing Strait as it was before the war, plus a nuclear agreement no more comprehensive than the 2015 Iran nuclear deal—after a hundred days of war, the best ending is a return to the starting point.
Most traders view the timing of China's return to its pre-conflict crude purchasing levels as a key variable for oil price direction. But even if answers are found to the above questions, the market still faces an unavoidable gap.
The head of Vitol's Bahrain office, the world's largest independent oil trader, said at a conference this week: "Basically everyone is expecting a solution just around the corner. But no matter how quickly capacity is restored, you still face a gap—call it what you will—of 1 billion barrels of oil that has disappeared."
Global spare supply is rapidly diminishing. According to the Pimco executive's assessment, buffers could be exhausted within the coming months—at which point, even relatively small supply disruptions could be enough to trigger a sharp price spike.
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