In the immediate aftermath of the U.S. and Israeli strikes on Iran that prompted the latter to shut down the Strait of Hormuz, most reports dealt with numbers—numbers showing the amount of oil supply lost due to the closure. Those numbers varied by source, but were all above 10 million barrels daily. Now, traders are saying the loss in supply may be much smaller.
“After an initial disruption at the onset of the conflict, flows strengthened as alternative logistics scaled up,” analytics provider Kpler explained, as quoted by Reuters, last week. These alternative logistics included Saudi Arabia’s switch from the Strait of Hormuz to the Red Sea, via its East-West pipeline, and other Gulf producers taking to dark mode to smuggle their tankers through the chokepoint.
Yet it was Kpler again that reported an estimated cumulative loss of 961 million barrels for the period from the start of the war to May 22, translating into over 11 million barrels per day in lost supply. At the time, the firm’s analysts noted that the total supply loss could reach 1 billion barrels as seasonal demand for fuels jumps with the start of summer and many wells remain shut in for lack of storage capacity, while tanker traffic in the Strait of Hormuz remains severely disrupted.
Indeed, Kpler was among the more conservative estimators of supply loss. The International Energy Agency pegged the loss at 14 million barrels daily, warning of severe shortages emerging by July unless traffic resumes at pre-war levels. The U.S. Energy Information Administration was also guarded in its estimates, seeing the loss at over 11 million barrels daily and warning that this loss had necessitated draws from inventories. “Under our assumptions, we expect global oil inventories will fall by an average of 6.3 million b/d in 2Q26 and by 7.6 million b/d in 3Q26,” the EIA said in its May Short-Term Energy Report.
However, Reuters quoted “sources at two major trading companies” as saying that the actual supply losses as of June could be just 5 to 6 million barrels daily because producing nations found ways around the Hormuz closure. A claim by U.S. President Donald Trump that the country’s Navy had helped ship 100 million barrels out of Hormuz contributed to an increasingly bearish mood on markets, even though the claim was challenged and never verified.
On the demand side, a slide in Chinese consumption of crude helped keep prices under control, Reuters’ sources and other observers alike note. China saw its imports of oil drop considerably in May, reaching the lowest in eight years. The news was taken to mean consistent demand destruction in the world’s largest oil importer, reducing the significance of any supply loss. Indeed, one of the Reuters sources states that when one factors in China’s demand decline, the total oil market imbalance could be just 2 million barrels daily.
“It’s an indication that commercial oil markets are sufficiently supplied for now, given all the ways the world has adapted to the shock,” one SEB analyst told Reuters, commenting on the decline in oil prices over the past couple of months.
The world has indeed adapted to the shock, with governments in Asia especially active in the adaptation activity due to the continent’s overwhelming dependence on Middle Eastern oil. Adaptation has included fuel sales caps, price hikes, and subsidies, and advice along the lines of conserving fuel as much as possible. Asia has also seen its supplier base change as a result of the war, with the United States boosting its share in the region’s oil import mix—at a cost.
U.S. crude oil imports have soared to make up for the lost barrels from Iraq, Iran, the UAE, Kuwait, and the rest of the Gulf states. But it has had to tap into its own inventories to respond to demand, with those inventories as a result falling to a level close to what some analysts have called the “danger zone”, per the Reuters report.
Global crude oil inventory levels appear to be the only point of concern remaining, now that the amount of lost supply is subject to debate. The lower these inventories fall, the higher oil prices would jump when the low inventory levels become palpable.
Chevron’s chief executive warned of that earlier this month, saying “The buffers and the shock absorbers are being steadily drawn down and the ability for the market to absorb this imbalance is drastically diminished today versus where we started and over the next few weeks, we’re likely to see those pressures flow through more directly to physical prices, and there’s more upward pressure that I would expect as we get into June and certainly into July.” A senior Exxon executive also warned that inventory depletion will not be good for prices.
With the Hormuz disruption numbers being revised, disputed, and rejected, and with reports suggesting a deal between the U.S. and Iran may be imminent, the oil market may slide further into a sense of security. Whether it is justified or false remains to be seen.
By Irina Slav for Oilprice.com
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