The global oil market's ability to absorb shocks from the Strait of Hormuz is diminishing rapidly. While earlier disruptions were managed due to lower demand, increased non-Gulf production, and significant inventory drawdowns, these buffers are now severely depleted. Roughly 20 million barrels per day of crude and refined products, representing one-fifth of global consumption, were initially cut off by the Hormuz closure.
The initial phase of the conflict saw crude prices stabilize between $90-$100 per barrel, largely due to demand compression, particularly in Asia, and a nearly 2 million barrels per day rise in oil production from countries like the United States, Venezuela, Guyana, and Russia. Global stocks, including commercial inventories and strategic reserves, covered the remaining deficit. However, by the end of May, over 1.1 billion barrels of crude, equivalent to about 10 days of typical global consumption, had not reached the market, surpassing shortfalls during the 1973 oil shock and the Iran-Iraq war.
Renewed violence in the Strait of Hormuz, with Iran declaring it closed "until further notice," has reversed recent progress in tanker traffic. After an MOU in mid-June briefly allowed crude and condensate exports to reach 7 million barrels per day, with 10 million barrels per day post-MOU, data from Kpler showed just six tankers crossing between July 12-16, with none since July 14. This new phase of the conflict begins with global inventories already low, posing a significant risk of more acute market distress, especially if hostilities spread to the Red Sea.
Global oil inventories have fallen by a cumulative 360 million barrels between March and May, and another 96 million barrels in June. U.S. inventories of crude and refined products are at their lowest in decades, with gasoline inventories at their lowest since 2012 for this time of year. Experts warn that the world has far less capacity to absorb another major shock, and it could take two to three months for significant oil flows to resume after a full reopening of the strait, with concerns about permanent output losses.
Policymakers are urged to rebuild inventories, diversify energy routes and sources, and provide targeted, temporary government support to consumers. The current situation highlights the world's vulnerability to relying on a single chokepoint and the critical need to replenish stocks before the next potential shock.
