When the Strait of Hormuz narrowed, many were preparing for $200 a barrel of oil. More than three months later, this nightmare scenario is still not in the picture.The disruption, which removed more than 10 million barrels per day of Middle Eastern supplies from the market, sparked warnings of crude oil prices rising to as much as $200 a barrel.
Instead, the price of oil remained below $100, supported by a combination of strong US exports, weaker Chinese demand, and alternative supply arrangements.“People thought it was going to be a lot worse,” President Donald Trump said Friday. “Today I looked at $96 a barrel, people thought that would be $300 a barrel.” After the United States and Israel launched joint strikes on Iran, Iran tightened its noose on the vital Strait of Hormuz.
This barrier disrupted oil supplies around the world as the corridor carried 20% of the world’s energy supply. As a result, crude oil prices rose beyond $125 per barrel compared to $70 levels earlier. Now, fuel prices are hovering near the $100 per barrel range, well below analysts’ expectations.Here’s what has prevented crude oil prices from reaching the $200 level so far:
Going to Hormuz and beyond
Oil-producing countries in the Arabian Gulf have sought to find alternative ways to maintain exports.
Saudi Arabia redirected crude oil via its east-west pipeline to the Red Sea, while the United Arab Emirates used pipelines to Fujairah outside the Gulf.Some ships continued to use the Strait of Hormuz despite the risks. According to shipping data, daily transits have fallen to two or three ships from about 100 before the conflict. However, an official familiar with US Central Command operations, cited by Bloomberg, reported a much higher figure, saying nearly 1,000 commercial ships had transited the waterway over the past two months.“As a minimum of what would be considered a meaningful recovery, I think we would need to see a full week averaging 20 ships a day — and that is not realistic until there is a permanent settlement between the US and Iran, which is constantly being pushed,” said Pavel Molchanov, an analyst at Raymond James.
Restricting and redirecting oil flows
Meanwhile, China, the world’s largest oil importer, reduced inbound shipments by nearly 40% in May compared to last year’s average, according to Vortexa Ltd.
This decrease helped compensate for a large portion of the barrels lost due to the conflict.Analysts attribute the slowdown in part to the country’s decision to halt the expansion of its strategic reserves. The increasing use of coal in the production of chemicals and the increasing dependence of electric cars on oil consumption have also affected.Kpler and Energy Aspects Ltd estimate that Chinese refinery throughput in May and June is about 13 million barrels per day, compared with an average of 14.8 million barrels per day last year.“China’s retreat from the crude oil market has played a crucial role in trying to rebalance the global market, which has helped determine oil prices,” Warren Patterson, head of commodity strategy at ING Groep NV in Singapore, told Bloomberg. “The extent of that has surprised most of the market.”At the same time, the United States also boosted its exports. US shipments of crude oil and fuel in May were more than 2 million barrels per day higher than the average recorded throughout last year.“After more than three months of this conflict, the world has proven its amazing resilience,” Maria Angelikosis, CEO of the Angelikosis Group, said this week. “Commodity prices are up 50% or 60%, Asian LNG prices are up 90%, but at least not at the high levels I personally expected.”The United States relied heavily on its position as a major energy exporter to support markets, and pledged to release 172 million barrels of strategic petroleum reserve.
Nearly half of the barrels released were shipped abroad, including to Europe.Market sentiment was also shaped by expectations that a diplomatic solution was still possible. Traders have become cautious about maintaining large bullish positions, with open interest in Brent crude futures falling to its lowest level since August.Meanwhile, the chaos in the Middle East that began on February 28 has continued to weigh on oil markets, for nearly 100 days now.
