The Strait of Hormuz is open again after Iran and the United States signed a memorandum of understanding this week. But for the global oil market, it may be too late.
Oil hasn’t been flowing out of the Middle East for nearly four months. All told, the world lost 1.15 billion barrels of oil supply during the war, according to analytics firm Kpler. That has left the oil market in a precarious state, rapidly approaching a breaking point.
The International Energy Agency’s strategic petroleum reserves are at their lowest levels since 1990. The American emergency reserve is at a 43-year low. Commercial inventories have hit operational stress levels. A critical oil hub in Cushing, Oklahoma, which pipes fuel around the United States, has just hit its operational stress level — the equivalent of when the coffee drops below the spigot, and you need to tip the urn to get the last bits of sludge into your mug.
“You want to see bedlam?” President Donald Trump said at the G7 in Versailles Wednesday. “We run out of reserves in about four weeks.”
The Tipping Point
The oil market certainly believes Trump’s timing is impeccable. Prices have fallen like a rock in recent days as the memorandum with Iran took shape. Brent crude prices began falling after the mid-April ceasefire announcement, sinking from a wartime peak of $126.41 to below $80 a barrel today.
Underpinning oil’s decline was the historic oversaturation of crude going into the war that cushioned the world from its biggest-ever supply shock. But that oversupply has evaporated and rapidly turned into a concerning deficit.
The world’s oil stockpiles have fallen sharply by 190 million barrels over the past several months. Storage facilities around the world are nearing a tipping point. Much of what collects at the bottom of an oil tank is unusable gunk, making it hard to maintain pressure in the pipes to get oil out to customers.
Trump warned of a looming “economic catastrophe” had the strait not reopened. He said that would have brought him comparisons to Herbert Hoover, the former president who oversaw the beginning of the Great Depression.
Why Reopening Isn’t Enough
Reopening the strait won’t immediately solve the world’s inventory problem. It will only start the process of getting oil to flow normally again. The strait will need to be de-mined, empty tankers will need to start coming back, production will need to restart, and oil will need to begin its slow journey to its destination.
That process could take months before the flow of oil returns to something approaching “normal.” Until then, the system will continue to rely on those depleted stockpiles.
That’s why a number of industry analysts believe oil prices have moved too low, and the market is underpricing the risk of effectively running out of oil before the tanks can be replenished.
“The market has jumped 7 steps ahead of where we are now,” said Helima Croft, head of global commodity strategy at RBC Capital Markets. “Everyone’s like: ‘This is over!’ But there’s a major logistical challenge to get back to where we were.”
The Price Outlook
Once the euphoria of the reopened strait ebbs, market fundamentals should eventually take over, sending oil prices higher again.
“Regardless of what happens in the coming weeks in the Strait of Hormuz, US consumers are in for higher prices in the summer months,” said Matt Smith of Kpler. “It hasn’t played out that way yet because of the optimism about a deal. But market forces have to come into play here.”
The math is stark: Even if the global oil market started producing nearly 5 million more barrels of supply than customers demanded — as the International Energy Agency predicts — it would take around a year to get back the 1.15 billion barrels of lost supply.
“At some point physical barrels actually matter,” said Dan Pickering. “If you lose those barrels, that matters.”
However, some analysts argue the market isn’t always logical. Traders see the flood of oil about to come back online, particularly from cash-starved OPEC members eager to ramp up production. That new reality may make it very hard to change the oil market’s momentum.
The Bottom Line
The world lost 1.15 billion barrels of oil supply during the nearly four-month closure of the Strait of Hormuz. US emergency reserves are at a 43-year low, and commercial inventories have hit operational stress levels. While the strait has reopened, it will take months to restore normal oil flows. Analysts warn that US consumers are likely to face higher prices this summer as market fundamentals catch up with the supply deficit.
