When the Strait of Hormuz tightened, many were ready for $200 a barrel oil. More than three months later, that nightmare scenario is still nowhere in the picture.The disruption, which removed more than 10 million barrels a day of Middle Eastern supply from the market, had threatened to push crude prices as high as $200 a barrel. Instead, a combination of strong US exports, weak Chinese demand and alternative supply arrangements is keeping oil below the $100 mark.“People thought it was going to be very bad,” President Donald Trump said Friday. “Today I saw $96 a barrel, people thought it was going to be $300 a barrel.” After the US and Israel launched joint attacks on Iran, the country has tightened its noose on the vital Strait of Hormuz. The chokehold disrupted oil supplies around the world as 20% of global energy supplies flowed through this route. As a result, crude oil prices rose from the earlier level of $70 to beyond $125 per barrel. Now, fuel prices are swinging near $100 a barrel, well below analysts’ estimates.Here’s what has kept crude oil prices from reaching the $200 level so far:
Hormuz and beyond
Oil producing countries in the Persian Gulf have looked for alternative routes to maintain exports. Saudi Arabia has redirected crude to the Red Sea through its East-West Pipeline, while the United Arab Emirates has used pipelines running outside the Gulf to Fujairah.Some ships continue to use the Strait of Hormuz despite the risks. According to shipping statistics, daily transit has dropped to two or three ships from about 100 before the conflict. However, an official familiar with US Central Command operations quoted by Bloomberg gave a much higher figure, saying that about 1,000 commercial vessels had transited the waterway in the past two months.Pavel Molchanov, an analyst at Raymond James, said, “What at least counts as a ‘meaningful recovery’, I think we would need to see a full week to see an average of 20 ships per day – and that’s not realistic unless there is a durable US-Iran agreement, which keeps being pushed out.”
Stopping and diverting oil flow
At the same time, according to Vortexa Limited, China, the world’s largest oil importer, reduced inbound shipments by about 40% in May compared to last year’s average. This decline has helped to compensate for a significant portion of the barrels lost due to the conflict.Analysts believe the slowdown is partly due to the country’s decision to halt the expansion of its strategic reserves. The increasing use of coal in chemical production and increasing adoption of electric vehicles have also impacted oil consumption.Kpler and Energy Aspects Ltd. estimate Chinese refinery throughput in May and June at about 13 million barrels per day, compared with an average of 14.8 million barrels per day last year.“China’s withdrawal from the crude market has played an important role in the effort to rebalance the global market, helping to keep oil prices under control,” Warren Patterson, head of commodity strategy for ING Group NV in Singapore, told Bloomberg. “The extent of which has surprised much of the market.”Meanwhile, the United States also increased exports. U.S. shipments of crude oil and fuel in May were more than 2 million barrels a day more than last year’s average.“Three months into this conflict, the world has proven surprisingly resilient,” Maria Angelikousis, chief executive officer of Angelikousis Group, said in comments this week. “Commodity prices have gone up 50% or 60%, Asian LNG prices have gone up 90%, but they are not at the high levels that I would have expected, at least personally.”The US has relied heavily on its status as a major energy exporter to support markets, and has pledged to release 172 million barrels from the Strategic Petroleum Reserve. About half of the barrels released have been shipped abroad, including to Europe.Market sentiment is also shaped by the hope that a diplomatic solution is possible. With open interest in Brent crude futures falling to its lowest level since August, traders have become cautious about maintaining large bullish positions.Meanwhile, the Middle East chaos that began on February 28 has continued to weigh on oil markets for nearly 100 days.