For decades, experts warned that the closure of the Strait of Hormuz would cause a global economic catastrophe. However, more than three months after the waterway was effectively blocked, creating the worst supply shock in modern history, crude oil prices have remained below $100 a barrel, significantly lower than the grim forecasts of $200. This resilience has been attributed to a host of workarounds and market forces.
Several factors contributed to preventing the anticipated price surge. Record U.S. oil exports, a surprising slowdown in Chinese demand, and a continuous, albeit reduced, flow of crude through the strait helped absorb much of the shock from the loss of over 10 million barrels per day of Middle Eastern supply. Additionally, a pre-war surplus of oil provided a cushion against the immediate impact. The world entered the Iran war with 407 million barrels of usable oil in storage, and the International Energy Agency released a record 400 million barrels from its strategic petroleum reserves, further boosting supply.
Other significant mitigating factors included a substantial decrease in consumer demand for oil, estimated by JPMorgan to be 800 million barrels between February and August. The decision by President Trump to lift sanctions on Russian and Iranian oil also added hundreds of millions of barrels to the market. Furthermore, pipelines were utilized to reroute crude out of the Middle East, bypassing the Strait of Hormuz, potentially moving as much as 4 million barrels per day.
Despite these mitigating factors, the limits of some workarounds are becoming apparent. Overall oil inventories in the U.S. recently dropped to a 20-year low, and emergency reserves have little capacity left. Fuel stockpiles also face critical lows as the peak summer demand months approach. Traders anticipate China's eventual return to pre-war oil purchasing levels, which could be a key factor in future price movements. The market's expectation of an imminent peace deal and the restoration of production has also played a role in keeping prices down, though a "billion barrels of oil that is missing" remains a long-term concern.
While some analysts, like Rory Johnston, had warned of oil soaring to $200 or beyond if the Strait remained blocked, the combination of increased supply, decreased demand, and strategic releases prevented such an extreme outcome. Brent crude never settled above $115, and U.S. oil did not exceed $113 a barrel, falling short of predictions as high as $150 or even $200 that many respected oil analysts had made.
