Ten weeks into the war in Iran, the great mystery of the oil market deepens. Every day the Strait of Hormuz remains closed, nearly 14 million barrels of oil are lost, 14% of global production. Yet Brent is trading at only $107 a barrel, well below the $129 reached in 2022 and far from the $150-200 predicted by analysts in case of a prolonged conflict.
One reason is traders’ optimism about a possible diplomatic breakthrough. Every few days, President Donald Trump hints at an imminent resolution, making markets reluctant to price in another eight weeks of disruption. But lately, something else is happening: even “spot” prices have calmed – writes The Economist.
WHY THE OIL PANIC HAS DISAPPEARED
Two forces explain why the panic has faded. First, oil powers outside the Gulf have accelerated exports. Small producers like Canada, Venezuela, Norway, and Brazil have contributed. However, the most striking case is that of the United States: with nearly 9 million barrels per day (b/d), their net oil exports in the last four weeks have been the highest in history.
All this has helped bring a wave of barrels not coming from the Gulf to importers, reducing the supply deficit to about 8 million b/d. Incredibly, in the same period, major buying regions imported 11 million b/d less than the previous year. Only China’s purchases collapsed by as much as 6.6 million b/d.
This huge drop in imports is not good news: it partly reflects “demand destruction.” The crude shortage forced refineries in Asia and Europe to cut production. Diesel, gasoline, and jet fuel prices rose by 60-120%, pushing consumers to reduce consumption.
Yet, since estimates of demand destruction are below 5 million b/d, much of the import decline seems to reflect caution more than deprivation. The surprising result is a “mini-glut” of crude that keeps Brent prices low.
How long can this last? Satellite images of Chinese tanks suggest that onshore stocks have remained almost unchanged, implying that refineries have drawn on unobservable underground reserves to cover the deficit.
THE UNITED STATES’ PROBLEM
A bigger problem could come from the United States. In March, the country agreed to draw 172 million barrels from its strategic reserves. This allowed crude exports to increase by over 600,000 b/d while keeping commercial stocks stable, despite production not rising significantly since the war began.
However, American exports are now more likely to fall than rise. With the refinery maintenance season ending, crude will be redirected to the domestic market. Moreover, fuel stocks in the United States are plummeting. If the trend continues, gasoline could exceed $5 per gallon, a threshold that has severely damaged presidential approval in the past.
In recent weeks, the Trump administration has considered a ban on refined product exports to avoid such damage. If pump prices jump by “Memorial Day” on May 25, the chances of a blockade would increase drastically, disrupting global energy markets. Even without political interventions, global stocks will continue to decline. America and China have bought the world time, but the reckoning remains inevitable if Hormuz stays closed.
