In the 0 second since you’ve been reading this story, the net amount of oil lost to disruption through Hormuz is 0 barrel
If the strait stays closed, the world will have to significantly reduce its oil and gas consumption — but not before prices spike to a level that forces consumers and businesses to fly, drive and spend much less. Already, demand has begun to drop, and some countries in Asia are hoarding and rationing fuel. US government officials and Wall Street analysts are starting to consider the prospect that oil prices might surge to an unprecedented $200 a barrel.
“It’s clear to me if this crisis lasts more than three or four months it becomes a systemic problem for the world,” Patrick Pouyanne, chief executive officer of TotalEnergies SE said at the CERAWeek conference in Houston. “We cannot have 20% of the crude oil, which is exported globally, stranded in the Gulf and 20% of the LNG capacity stranded, without any consequence.”
A simple back-of-the-envelope calculation suggests the closure of the strait is reducing global oil flows by some 11 million barrels a day, after accounting for the interventions so far aimed at offsetting the loss. When compared with pre-war demand levels, that leaves a roughly 9 million-barrel shortfall — a yawning gap that is more than the oil consumption of the UK, France, Germany, Spain and Italy combined. Lower demand, particularly in Asia, is already helping to force a closing of that gap. (The market also entered the war in a surplus.)
But for supply this may be as good as it gets. A massive emergency stockpile release and US waivers on Russian and Iranian oil sanctions have bought some time, but they are finite interventions. Once they’re exhausted, it’s not clear what further tools President Donald Trump has to keep global oil prices from surging in the near term – other than fully reopening the strait. Iran has been allowing a trickle of foreign ships to pass through the waterway, but the numbers so far do little to move the needle.
Saudi Arabia and UAE Move Oil Through Pipelines After Attacks
Sources: Institute for the Study of War and AEI’s Critical Threats Project; US Central Intelligence Agency; US Department of Energy; Armed Conflict Location and Event Data (ACLED); Joint Maritime Information Center; Bloomberg News reporting
Note: Attacks claimed by Iran but disputed by the ship’s crew have been excluded. In some cases, minor damage can be the result of interception debris. Locations may be approximate.
The situation is even more extreme in liquefied natural gas. The Strait of Hormuz typically accounts for about a fifth of global supply, with the final cargoes on the way from the Middle East now about to arrive at their destinations. Unlike in oil, there are no alternative routes to get the gas to market and very few strategic stockpiles to cushion the shortfall.
The US is the world’s biggest LNG exporter, and its domestic gas market is relatively insulated from the war due to its massive production.
But it’s not just fuel: petroleum is used to make plastics, which are used in just about everything.
Key Gulf suppliers have already reduced oil production as storage in the region fills up. And the longer the strait remains closed, the greater the risk that key energy production assets are damaged in the conflict, resulting in an even more prolonged impact on supply. Already, parts of the world’s biggest LNG plant have sustained missile damage which owner QatarEnergy warned will take up to five years to repair.
For the global economy, the shock from the Iran war has already begun. Bloomberg Economics’ big data price tracker puts the US CPI for March at 3.4% year on year – a marked increase from 2.4% in February, and with rising fuel prices the main culprit.
Looking more broadly, with oil around $110 a barrel, Bloomberg Economics SHOK model projects a marked but manageable boost to prices and blow to growth. In the euro area, those numbers are about 1 percentage point on annual inflation and 0.6% off GDP.
But if the Strait of Hormuz stays closed too far into the second quarter, the risk is that oil prices move sharply higher. At $170 a barrel, the impact on inflation and growth roughly doubles — a stagflationary shock that could shift everything from the path ahead for central banks to the outcome of the US midterm elections.
How high will prices need to go to crush demand?
“When you start talking about what price that is, we’re venturing into the unknown,” Greg Sharenow, who helps manage nearly $20 billion as head of Pimco’s commodity portfolio investment team, said in a recent podcast. “If that is the adjustment that the market has to make, you’re going to find pain the hard way.”
Container Ship Safeen Prestige Was Struck by Iranian Missiles
Sources: Copernicus/Sentinel-2; Institute for the Study of War and AEI’s Critical Threats Project; Bloomberg analysis of data from S&P Global Energy and Woodmac
For now, oil prices have yet to reach panic levels. Futures closed last week just above $112 a barrel, up 55% since the war began but far below 2008’s all-time high of $147.50. European natural gas prices are up 70% since the start of the conflict, but have come nowhere near the peaks set during the 2022 energy crisis.
Part of the reason is that traders are assuming that Trump will abandon the conflict before the economic toll of a prolonged war reaches extreme levels.
The US president has also repeatedly sent prices plunging with a series of social media posts suggesting the war will end soon – which make it difficult for traders to bet with conviction on higher oil prices.
The impact on supplies has been partly alleviated by Saudi Arabia and the United Arab Emirates rushing to reroute oil via pipelines that circumvent the Strait of Hormuz, while the US and other governments have announced a record release of stockpiled oil to help tame prices.
It’s not clear how quickly all those inventories are flowing to the market. US Energy Secretary Chris Wright indicated the release coordinated by the International Energy Agency could reach a level of 3 million barrels a day, but for our calculations Bloomberg has used a more conservative 2 million from analysts at Morgan Stanley. China also has significant oil inventories that it can draw on to soften the supply impact.
In other measures, the US also temporarily lifted sanctions on Russian and Iranian oil that was stranded at sea in floating storage – making it available to a much larger pool of buyers who have quickly stepped in.
The measures taken so far are yet to assuage the concerns of major consuming nations. Japan has already asked the IEA to consider an additional coordinated release of oil reserves if needed.
The merits of another stockpile release were also raised at a recent European Union energy taskforce meeting, according to a person familiar with the matter, although some countries argued that such a move should be reserved for when actual physical disruptions emerge, rather than for price management. And it’s unclear if further releases would actually boost the amount of oil on the market or simply mean that discharges carried on for longer.
With a record release already underway one month into the crisis, it’s not clear how much more the US can do to protect American consumers from price shocks, said Mike Sommers, CEO of the American Petroleum Institute.
“The playbook is pretty bare at this point,” Sommers said in an interview.
Major Buyers of Gulf Oil Are Missing Millions of Barrels
Oil transits from the Gulf to major clients
- Trade halted
- Trade decreased
- Trade increased
Source: Tanker tracking data compiled by Bloomberg
Note: Data as of March 26. Oil flow from Saudi to the US is only direct shipments, more may have gone from Egypt where the Saudis store crude.
While crude oil futures have remained well below their peaks, prices for refined fuels like diesel and jet fuel have rocketed in recent weeks — at times topping $200 and offering the first glimpses of demand destruction in Asian markets which rely heavily on both crude oil and liquified petroleum gas shipped through the Strait of Hormuz.
Pakistan has told cricket fans to watch games from home to preserve fuel. There are shortages in Thailand, while hundreds of gas stations in Australia have reported fuel shortfalls and carriers have canceled flights from Vietnam to New Zealand. A handful of Asian nations, including China — the world’s biggest crude oil importer — are curbing exports. South Korea has announced a five-month restriction on the export of naphtha, a fuel that helps make petrochemicals and gasoline.
Consultant FGE NexantECA estimates that Asian demand is already down by almost 2 million barrels a day this month. The bulk of the demand hit so far has been in the petrochemical sector, though there have also been reductions in gasoline, jet fuel and diesel that are set to increase if the war persists into April, it said.
In Singapore, marine fuel prices are so high that buyers are reluctant to purchase more than they absolutely need and sellers don’t want to offload large volumes in case the scarcity continues and they run out of barrels to honor forward commitments.
As the crisis spreads, parts of Africa have already faced supply disruptions, and governments are implementing measures to reduce consumption.
Now, some in the industry are warning that Europe is heading toward scarcity pricing — particularly highlighting diesel, the lifeblood of the global economy. Several traders and analysts said that the region faces supply shortages within the coming weeks if the Strait of Hormuz is not reopened, with similar pressures also expected in Latin America.
The main message is that
we’re going to get the energy transition forced on us in a very painful way that’s going to happen very quickly.
If the strait remains closed for a second month, traders and analysts say they expect global energy markets will quickly evolve into a fight for supplies, driving up prices and benefiting buyers and countries that are able to outbid others.
Already, some LNG suppliers are becoming more selective in negotiating mid- to long-term volumes because it’s more lucrative to sell into the spot market, said Steven Wilson, a partner at the global energy practice at Mayer Brown.
Several industry participants said they were seeing signs that US oil exports to Asia are poised to surge in April, as refineries hunt for alternative suppliers to replace Middle East barrels.
In Latin America, a senior oil trader described receiving calls from buyers they had been unsuccessfully courting for years, who are now desperate to purchase – and willing to seal deals with little or no negotiation.
Little Use
Typically, when the world faces an oil supply shock, the market looks to Saudi Arabia — the de facto leader of the OPEC+ group and only country with significant remaining untapped production capacity.
But with the kingdom’s exports throttled by the closure of the Strait of Hormuz, its ability to pump more out of the ground is of little use.
And while higher prices may lead to marginal increases in output in some areas like the US — almost half of the respondents to the Federal Reserve Bank of Dallas’s quarterly energy survey said the hike in prices would lead to them drilling more wells — it won’t be anything like the levels needed to offset what’s been lost through Hormuz. One executive at a major independent western oil company said the firm had received repeated requests from the US government to increase production since the war started.
As things stand, the scale of the supply removed from the market is at least as big as during the Arab oil embargo, when surging energy costs led to sharply slowing growth and stagflation. That shock resulted in not just a sharp drop in oil consumption by the end of the decade, but ultimately a sweeping overhaul of the global energy system.
Today, traders, analysts and economists are again predicting that global fossil fuel demand — and by implication economic activity — will have to meaningfully reduce to match the reduced supply if the strait stays closed.
“If you think about the magnitude of the shock coming out of the Gulf right now, you could lose between 5-10 million barrels a day of demand, which will have a significant impact similar to the seventies,” said Jeff Currie, chief strategy officer of energy pathways at Carlyle Group Inc. “The main message is that we’re going to get the energy transition forced on us in a very painful way that’s going to happen very quickly.”
The damaged Mayuree Naree bulk carrier near the Strait of Hormuz on March 11. Source: Royal Thai Navy
The impact extends far beyond fuels. Petrochemicals are used in everything from food packaging to polyester clothing, and manufacturers are already warning that a sustained conflict will lead to noticeable price increases.
Farmers and governments are also rushing to secure critical crop nutrients ahead of spring planting, as the war drives up prices and squeezes supply.
Global natural gas prices have eased since the last energy crisis and the market was bracing for further declines as more US and Qatari liquefied natural gas plants were due to come online and boost global supply. That outlook has been upended with some analysts now saying the world has moved from the possibility of a glut to a deficit later this year.
Europe is emerging from winter with storage tanks depleted, fueling prospects that it will have to purchase more LNG this summer to refill them. Many Asian LNG consumers — the top buyers of Qatar’s supply — have been curbing purchases of the fuel altogether due to higher prices. This is helping to free up LNG supply for other importers, but may not be sustainable for the rest of the year if companies need to replenish stockpiles. Hotter weather in the coming months could also increase competition for supplies.
Even when the strait opens, flows will take months to return to normal — even for those producers that haven’t sustained damage in the war.
“For as long as Hormuz remains closed, both oil and gas markets don’t balance,” said Aldo Spanjer, head of energy strategy at BNP Paribas. “The significant demand destruction we would require to balance oil and gas markets in a sustained Hormuz outage, will require significantly higher prices than today.”
In the 0 second since you’ve been reading this story, the net amount of oil lost to disruption through Hormuz is 0 barrel
