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An oil tanker unloads crude oil in China’s Shandong province on April 7. International benchmark Brent crude contracts have surged above US$111 a barrel over the past week.AFP/Getty Images
As volatile as oil futures have been, current prices suggest global shortages caused by the war in the Middle East are a fleeting problem. Sky-high prices for physical barrels, however, highlight worries over an unprecedented supply crisis.
Over the past week, international benchmark Brent crude contracts surged above US$111 a barrel after U.S. President Donald Trump threatened to destroy Iran’s power plants and civil infrastructure. They then fell well below US$100 after the two sides agreed on a two-week ceasefire. Even without a resolution to end the war, futures have weakened further. Brent settled down 4.6 per cent at US$94.79 on Tuesday.
But the world is still grappling with the largest-ever loss of oil supply as tanker traffic remains halted in the Strait of Hormuz, the narrow waterway that has become the main economic flashpoint of the conflict. Iran and the United States are both blockading shipping in the strait, through which as much as 20 per cent of the world’s oil normally transits.
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The price of oil for prompt delivery in Europe has surged to a record near US$150 a barrel. The gap between that and the futures price shows how fears of physical shortages are worsening among global refiners, prompting them to scramble for replacement supplies, the International Energy Agency said Tuesday.
Global oil supplies dwindled by 10.1 million barrels a day in March to 97 million a day, the IEA said in its monthly oil market report. The drop was the result of shut-in wells and Iranian attacks on Persian Gulf energy infrastructure, as well as the severely restricted shipping through the strait, the IEA said.
After peace talks failed to reach a resolution to the conflict last weekend, the U.S. directed its navy to blockade Iranian ports to prevent crude exports from the Islamic Republic, limiting supply even more.
Messaging from Mr. Trump and his administration has been more effective at limiting futures prices than expected at the beginning of the war, said Helima Croft, head of global commodity strategy and MENA research at RBC Capital Markets. Many analysts predicted prices could surge as high as US$200 a barrel, but they have remained below US$120.
“That said, the physical market warning signs continue to flash red, with differentials broadly strengthening further last week as physical market participants fail to envision near-term relief for ongoing tightness,” Ms. Croft wrote in a report.
Shortages have been most acute in Asia, where the lion’s share of Gulf crude is consumed, and especially in countries without large strategic reserves. Many of them have imposed fuel-saving policies.
Pakistan and the Philippines have mandated a four-day work week for public officials, Bangladesh has closed universities and limited air-conditioner temperatures, and Sri Lanka has instituted a QR-code-based system for fuel rationing. Airlines across Asia are trimming flight schedules owing to surging jet fuel prices and depleted supplies.
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Vehicles drive past switched-off street lights in Colombo, Sri Lanka, on April 2, as authorities ordered electricity-saving measures during an energy shortage.ISHARA S. KODIKARA/AFP/Getty Images
These measures and more prompted the IEA to cut its forecast for oil demand this year to a drop of 80,000 barrels a day from its previous projection of an increase of 650,000. The Paris-based energy watchdog also forecast a 1.5-million-barrel-a-day decline in demand for the second quarter of this year – the largest drop since the COVID-19 pandemic prompted governments to shut down large parts of their economies.
Meanwhile, countries are drawing down emergency reserves, with stockpiles falling by 85 million barrels in March. Stocks in importing Asian countries dropped by 31 million barrels in March and more declines are expected this month, the IEA said. The agency’s 32 member countries began releasing emergency supplies last month, earmarking a total of 400 million barrels to ease shortages.
“Resuming flows through the Strait of Hormuz remains the single most important variable in easing the pressure on energy supplies, prices and the global economy,” the IEA said in its report.
In proceeding with a U.S. blockade of Iranian oil, Mr. Trump could be trying to push China into getting involved in negotiations to reopen the Strait of Hormuz as its refineries face the loss of Iran’s supply, Ms. Croft said.
However, it’s not clear that China would want to get entangled in the conflict, as it built up large strategic reserves before the war began, and it may be realizing strategic benefits from the U.S. moving military assets away from Asia, she said.
North America, meanwhile, is not facing oil shortages as Canada and the U.S. are net exporters. But consumers are struggling with higher prices for fuel and other products that require shipping, such as food and basic household items.
On Tuesday, Canada joined numerous countries around the world in announcing temporary tax breaks on gasoline and diesel fuel.
