The International Energy Agency (IEA) has issued a stern warning regarding the escalating conflict between the US and Iran and its detrimental impact on global energy security. Fatih Birol, IEA Executive Director, stated that if the situation does not improve in the coming weeks, the world should be concerned, especially given the continuous blockage of the Strait of Hormuz. This narrow waterway, crucial for approximately one-fifth of global energy shipments, has been mostly impenetrable since the conflict began on February 28 with US and Israeli strikes on Iran.
The crisis has disproportionately affected Asian nations, which historically receive 80% to 90% of their energy from the Strait of Hormuz. Japan and South Korea have felt the pinch, but developing countries like Pakistan, Bangladesh, and India are suffering the most. The oil and gas supply crisis has severely impacted economies worldwide. While some factors, such as China's billion-barrel oil stockpile, increased electric vehicle usage, and the IEA's coordinated release of up to 400 million barrels, have somewhat moderated price increases, these measures are not sustainable long-term. Birol noted that the US, despite boosting production by 1-2 million barrels per day, cannot compensate for the shortfall if the Strait remains closed.
The renewed hostilities have led to a significant surge in oil prices, with Brent crude reaching $88 per barrel and West Texas Intermediate settling at $82 per barrel. The IEA's coordinated release in March, amounting to nearly three-quarters of the planned 400 million barrels, helped stabilize markets, but emergency stocks are dwindling to their lowest levels since 1983. The US Strategic Petroleum Reserve, which had 415 million barrels pre-conflict, released 172 million barrels to counter the disruption. Goldman Sachs initially reported Gulf oil exports recovering to over 80% of pre-war levels after a memorandum of understanding, but these flows have halted with the recent fighting. Analysts like Kyle Bertamini from Enverus warn that markets are underpricing the tightness in global supply, predicting "higher-for-longer" oil prices.
The IEA cautioned that an escalation in hostilities on July 7-8 could completely upend the forecast for a 2027 oil market surplus. The agency had previously projected a surplus of 4.62 million barrels per day in 2027, contrasting with an 860,000 barrels per day deficit this year, assuming producers could restart fields and refiners normalize product shipments. The closure of the Strait of Hormuz and attacks on Gulf energy infrastructure pose a "very relevant threat" of undersupply of crude oil, natural gas, and refined products, leading to severe concerns about higher inflation. Global headline inflation has already been revised up to 4.7% for this year, and prolonged conflict could reignite inflationary pressures and increase the risk of a broader global economic slowdown.
The crisis is also impacting developing countries, leading to potential health risks as people resort to hazardous alternative cooking fuels like dung and wood. Attacks on ships have intensified, with vessel crossings in the Strait falling to a three-week low of eight crossings last Thursday, according to Kpler data. Mohamed Abu Basha of EFG Hermes highlighted that while Kuwait's crude production saw a significant pick-up in June to 1.65 million barrels per day, it remains well below its 2.6 million barrels per day pre-war level, and the extent of damage to its oil production infrastructure is still unknown.
