The Iran war suddenly turned what had started as a year of oversupply in global oil and LNG markets into the worst oil and gas supply disruption in history.
Three months after the U.S.-Israeli strikes on Iran began on February 28, the world has already lost 1 billion barrels of crude oil supply, oil and gas prices have found a new, much higher floor, and whipsaw with violent volatility nearly every day, trade routes have shifted, and tanker rates have spiked. Actual supply shortages are emerging in Asia, while global crude and fuel inventories are crashing, suggesting the oil market could soon exhaust the buffers that kept prices from soaring to $150 and beyond during the worst supply crisis the world has ever seen.
As the Strait of Hormuz was de facto closed and traffic through the chokepoint, which handles 20% of global oil and LNG supply, collapsed by about 90%, Middle Eastern oil producers were quickly forced to curtail upstream output as storage spaces filled up. More than 10 million barrels per day (bpd) of crude were wiped off global daily production volumes, a figure no increase in supply from other parts of the world could offset.
LNG volumes from Qatar and the United Arab Emirates (UAE) were also trapped in addition to Qatar halting LNG production as early as March 2. Qatar later in March advised that its LNG export capacity may not return to pre-war levels for up to five years due to damage from Iranian missile strikes on the Ras Laffan complex, the world’s single largest liquefaction site. Related: Supermajor Warns Oil Prices Could Hit $160 Within Weeks
The world has now lost 1 billion barrels of crude and condensate supply, data from Kpler showed. As of May 22, cumulative crude and condensate supply losses in the Middle East had reached 961 million barrels, with the 1 billion mark breached by the end of May. Outright production shut-ins have also inched higher, with another 100,000 bpd likely to have gone offline in the past week, due to continued pressure in Iraq and Saudi Arabia.
In the Middle East, “seasonally-higher demand is coming, which could incrementally boost regional supply to meet demand, though the economic realities in the region may force some organic demand destruction as well, capping any summer-linked marginal increase in production levels,” Kpler’s Naveen Das wrote last week.
Amid the massive supply disruption, inventories are declining at an increasingly faster pace, including in the United States.
Excluding China, which has accumulated large buffer stocks of more than 1.2 billion barrels over the past year, the rest of the world has seen onshore stocks draw at an accelerating pace, according to Kpler.
Global stocks drew down at a pace of just over 1.5 million bpd in early May. This drawdown rate has now jumped to nearly 1.7 million bpd, Kpler’s data showed, suggesting that further tightness could lie ahead.
Shipping rates and routes have also fundamentally changed. Saudi Arabia, the world’s top crude exporter, is shipping oil out of its Red Sea port of Yanbu, bypassing the Strait of Hormuz, while the UAE is boosting and plans to further increase its capacity outside of the Strait with a new pipeline to Fujairah.
Moreover, the threat to tankers attempting to pass the Strait of Hormuz has created a new shipping reality. Dark-mode activity, with transponders switched off, is no longer for Iran-linked vessels only. It has spread to commercial shipping of non-sanctioned barrels and other goods that typically move through the chokepoint, data from Vortexa showed on Friday.
The vessels still willing to cross are increasingly doing so dark, “but the more important shift is not just the scale of dark activity; it is who is participating,” said Claire Jungman, Director of Maritime Risk & Intelligence at Vortexa.
“AIS-off movements through Hormuz are no longer only a sanctions-evasion signal. They have become a wider commercial response to conflict risk, operational uncertainty, and the need to keep Gulf cargo moving through one of the world’s most important energy chokepoints,” Jungman added.
The implication for the market is that it’s now more difficult than ever to track oil shipments in real time, according to Jungman.
“When clean products, LPG, and LNG also move with reduced AIS visibility, the uncertainty extends into refinery supply, product availability, regional inventories, and destination-level demand reads.”
By Tsvetana Paraskova for Oilprice.com
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