Brent crude oil has fallen by nearly $20 per barrel since mid-May, as markets bet on a breakthrough from US-Iran negotiations. However, a ceasefire is one matter; the restoration of pre-conflict freedom of navigation in the waterway is another.
A recent analysis by HSBC's commodity research team, led by Kim Fustier, poses a central question: the market discussion must shift from *when* the Strait will 'reopen' to *what* a resumption of transit will look like, and what a potential 'new normal' might be if passage continues to be managed.
Within this framework, if the Strait of Hormuz is neither fully closed nor fully open, but instead remains in a state of "partial reopening" for an extended period, the oil market supply gap could persist until 2027. If transit volumes cannot recover to at least 60% of normal levels, oil prices may need to remain in triple-digit territory to rebalance the market by suppressing demand.
Diversion pipelines can alleviate some pressure but cannot eliminate the problem. Pipelines in Saudi Arabia and the UAE can reroute some crude oil around the Strait. However, refined products and LNG do not have similarly simple alternative routes. Inventories are not an infinite buffer. Estimates suggest inventory drawdowns could continue through the summer, with a so-called "tank bottom" potentially only being approached in the fourth quarter.
A peace agreement does not equate to a full restoration of the shipping lane. The implicit logic in market pricing is that a US-Iran deal would see Hormuz transit return to its pre-conflict state. Yet, over recent months, Iran has established a management framework around the Strait.
In May, Iran announced the establishment of a "Persian Gulf Strait Authority" to assert its sovereign management over the waterway. Subsequently, the US Treasury's OFAC sanctioned this entity on May 28, stipulating that even "safe passage agreements" with Iran—without involving payments—could be violations.
This creates a stalemate: transiting without payment carries risks, while paying for passage violates US sanctions.
There are already signs that some industry participants are accepting this new reality. In May, tankers from Saudi Aramco and Abu Dhabi National Oil Company (ADNOC) transited the Strait; two VLCCs bound for Japan made successful passages; a South Korean tanker passed through for the first time after coordination with Iran; and a Greek shipping company publicly stated it would prefer to pay if it facilitated passage.
Daniel Yergin, Vice Chairman of S&P Global, described the current situation as a "grey zone that is neither fully closed nor fully open." Lloyd's List also noted a growing industry view that the pre-crisis state of free navigation may not fully return.
What the "New Normal" Might Look Like
As long as a supply deficit persists, oil prices may need to remain in triple digits. The analysts' base case scenario assumes a mid-June reopening of the Strait with a linear recovery to normal levels over three and a half months. However, the research also presents an alternative "partial reopening" path where Iran retains control and flows recover only gradually and incompletely.
For the crude oil market, the Strait does not necessarily need to recover to 100% capacity because pipelines can shoulder some of the load. But if the recovery rate is too low, the supply gap will remain unmanageable.
Third-party assessments of this scenario include: Kpler's "Iran Control" scenario from April 29 projects transit volumes recovering to about 40% of pre-war export levels by end-2026, stabilizing around 45% by end-2027, with friction from approval processes, mandatory routing through Iranian waters, and potential fees to Iran's Islamic Revolutionary Guard Corps.
Rystad Energy's "Narrow Agreement" base case from May 26 sees Hormuz crude flows recovering to about 10 million barrels per day (roughly two-thirds of pre-war levels) by end-2026, with an additional 5 million bpd diverted via pipelines.
Lloyd's List judges that a return to pre-crisis free navigation is unlikely. The final state may be a "managed Strait" under Iranian control, involving identity checks, tiered access by nationality, and fee collection, with volumes recovering to about 60%-70% of pre-war levels.
This represents a watershed for oil prices. A recovery of only 40%-45% would leave a supply gap until 2027. If Hormuz flows return to about 9 million bpd, combined with pipeline diversions, total Gulf exports would be around 14 million bpd, still leaving a deficit of 500-550 thousand bpd compared to pre-war levels. Global inventories cannot decline indefinitely, implying the need for an additional demand destruction of about 200 thousand bpd on top of the current 300-400 thousand bpd.
A 60% recovery improves the situation but remains challenging. By mid-2027, if Hormuz flows reach 12 million bpd, total Gulf exports would be 15-16 million bpd. In the second half of 2027, if the UAE pipeline expansion is operational, total exports could rise to 17.8 million bpd. This still leaves a deficit of about 200 thousand bpd.
To close this gap, either some demand destruction must become permanent, or supply must grow faster, for instance from accelerated US shale oil production. The conclusion is that as long as the market remains in deficit (a state of recovery below 60%), oil prices need to stay in triple digits to persistently suppress demand and drive market rebalancing.
Diversion Pipelines Are Expanding
Gulf oil producers are not idly waiting for the Strait to reopen; they are accelerating the expansion of land-based alternative routes. Saudi Arabia's East-West Pipeline (7 million bpd capacity) has been running at full capacity since mid-March, exporting an extra 300-400 thousand bpd via the Red Sea port of Yanbu.
The UAE's ADCOP pipeline (to the Fujairah port outside the Strait) has a current capacity of 1.5 million bpd but is already operating at 1.8 million bpd. On May 14, ADNOC announced an accelerated expansion aiming to more than double capacity to over 3 million bpd by 2027; the project is reportedly 50% complete.
Combined, these two pipelines offer structural capacity of about 500-600 thousand bpd. Analyst calculations suggest that if Hormuz flows recover to 14 million bpd (about 70%-75% of pre-war levels) and these pipelines run at full capacity (including the ADCOP expansion), most Middle Eastern crude exports could be restored.
More projects are advancing: Iraq is building a new 700-800 km pipeline with 220-250 thousand bpd capacity from Basra to Haditha for export via Syria, Jordan, and Turkey to the Mediterranean. Kuwait is in talks with Saudi Arabia and the UAE on pipeline cooperation, as it currently has almost no diversion options, and its oil exports have nearly halted.
A key limitation remains: new crude pipelines only solve crude export issues; they cannot address the transport of refined products (gasoline, diesel, jet fuel) and LNG, which require specialized facilities that pipelines cannot replace.
Inventory "Bottom" Is Not Imminent
Inventories form the second key narrative in this pricing dynamic. While some market voices suggest global stocks are nearing a bottom, analyst calculations present a different timeline.
Global observable inventories are projected to fall from about 7.95 billion barrels in April to approximately 7.5 billion in June and 7.4 billion in July—the lowest level in over a decade. In the base case (normal Strait reopening), global inventories would bottom around 7.3 billion barrels in August, beginning to rebuild in September, ending the year about 630 million barrels below the February peak of 8.2 billion.
In the "partial reopening" scenario, global inventories would continue declining to about 7.0 billion barrels by December 2026, roughly 1.2 billion barrels below the February peak, not recovering to June 2024 levels until September or October 2027.
Regarding the specific timing of a "bottom," analysts used the US as an example: the US National Petroleum Council historically defined 300 million barrels as the "minimum operating requirement" for crude stocks (about 78% of commercial inventories at the time). Applying the same ratio to the current US commercial crude stockpile of 434 million barrels (as of the week ending May 29) yields a minimum of about 337 million barrels. At the current drawdown rate, US inventories could bottom around October 2026, with global inventories bottoming around end-2026.
This contrasts with some market views: Jeff Currie of Carlyle Group suggested US stocks could hit minimum operating levels this summer (July). Neil Chapman, ExxonMobil's Executive Vice President for Upstream, stated on CNBC on May 28 that the world is "getting close to unprecedented low inventory levels... within two or three weeks." Fatih Birol, Executive Director of the International Energy Agency (IEA), said on May 21 that if the situation does not improve, we could enter a red alert zone in July or August.
HSBC's stance is that inventories falling to the lower end of a five-year range does not, in itself, constitute an "imminent crisis signal"; the real pressure point is more likely to emerge in the fourth quarter of this year.
Insufficient Demand Destruction, Price Pressure Remains
The demand-side response has been relatively muted so far. OECD demand has only edged down, with weakness concentrated in Asia (South and Southeast Asia) and the Middle East. US gasoline and diesel demand is flat year-on-year. Key road fuel demand in Europe has only slightly declined, primarily in petrochemical feedstock demand, which is more supply-constrained than price-driven.
Vitol estimates current demand loss at 4-5 million bpd, higher than the IEA's previous estimate of 2-3 million bpd. If the Strait of Hormuz remains in a state of "partial management" long-term, the only path to market rebalancing is prices remaining high enough to persistently suppress demand until supply and demand are realigned.
Comments