Global Energy Market on the Brink of Disaster, World Beginning to Run Out of Supplies

Jakarta, CNBC Indonesia - The global energy market is assessed to be increasingly close to the abyss of a deeper crisis following the United States’ (US) war with Iran, which has continuously disrupted oil and gas supplies from the Gulf region. Although the impact has not yet been fully felt in Western countries, the real pressure is said to be building up and could turn into a disaster if the Strait of Hormuz is not reopened soon.

Market optimism briefly emerged on 17 April when Iran’s Foreign Minister stated that the Strait of Hormuz was “fully open”. That statement immediately drove Brent oil prices down 10% to US$90 per barrel.

However, just a few hours later, Iran reversed its stance and attacked an Indian tanker. On the following trading day, Brent prices only rose by about 5%.

To date, Brent prices remain around US$20 below their peak at the end of March, even as the US blockade on Iranian oil keeps more supplies trapped in the Gulf region.

Fifty days since the Iran war broke out, the world has lost 550 million barrels of crude oil from the Gulf, equivalent to nearly 2% of last year’s total global production. Every month the Strait of Hormuz remains closed, the world also loses around 7 million tonnes of liquefied natural gas (LNG), or equivalent to 2% of annual global supply.

In Western countries, which are the main hubs for futures contract trading, the pressure so far appears limited. Petrol prices have indeed risen slightly, but most households can still afford to drive.

Trucks are still running, planes are still flying, and fuel stocks are still near pre-war levels. However, this situation is considered misleading.

On 20 April, the last tankers that successfully crossed the Strait of Hormuz before the war began finally arrived at their destinations, including in Malaysia and California.

This means that there are now almost no more buffer reserves protecting the world from supply shocks, at a time when seasonal demand is starting to increase with the holiday period.

Citing The Economist, which has compiled several indicators to measure how close the world is to an energy disaster.

The results show that significant damage has already occurred. Indeed, if the Strait of Hormuz is not reopened, energy costs could surge even higher and trigger disruptions that cripple the fuel supply system.

Reopening the strait could still prevent a total disaster, but additional pressure is said to be unavoidable.

Three Major Pressures

There are three main factors now pushing the global energy market to the brink. First, the cargo of oil available for purchase is increasingly thinning.

Second, refineries are starting to cut fuel production. Third, demand remains unusually high, particularly in Europe.

From a trading perspective, one reason the largest supply shock in history has not yet triggered global panic is the large amount of oil already at sea when the war broke out, nearly approaching a record. When US warships began moving to the Gulf in February, countries in the region temporarily increased exports.

However, after the last shipment arrived, those at-sea oil stocks are now depleted. The same has happened to most Iranian and Russian oil cargoes that were previously stuck at sea but eventually found buyers after the US eased sanctions on both countries.

The volume of oil at sea has also fallen at a very high speed. For aviation fuel and petrol, the volume is now far below historical patterns, and possibly approaching the minimum limit for sea trade to continue normally.

Asia Most Strapped

This situation puts Asia in the most difficult position. Before the war, the region received about four-fifths of exports from the Gulf. Now, supplies in several Asian countries are starting to thin.

South Korea is scheduled to begin reducing releases from its strategic reserves in the coming days. Meanwhile, Japan’s reserves are estimated to run out in May.

According to Kayrros, a company that estimates inventories via satellite imagery, Asian crude oil stocks outside China fell by 67 million barrels or 11% in the month up to 19 April.

Shortages of raw materials are also forcing Asian refineries to cut processing by more than 3 million barrels per day, or about 10% of their combined capacity. According to Neil Crosby of Sparta Commodities, those cuts could rise to 5 million barrels per day in May and even 10 million barrels per day in July if the Strait of Hormuz remains closed.

China could actually help by releasing some of its 1.3 billion barrel crude oil reserves. However, the Bamboo Curtain country has instead halted exports of its refined oil products.

A trader familiar with China’s energy strategy believes Beijing will not open the supply tap until there is a genuine lasting ceasefire.

This situation worsens the shortages that had previously emerged due to the loss of finished fuel exports from the Gulf, which had also been one of Asia’s supports.

Fuel Prices Soar

Refined fuel prices are now extremely high. In the Asian spot market, petrol prices are approaching US$120 per barrel, diesel reaching US$175 per barrel, and aviation fuel breaking through US$200 per barrel. Before the war, they were still in the range of US$80, US$93, and US$94 per barrel respectively.

Demand is starting to adjust, partly through government policies. Seven countries have implemented work-from-home mandates, while at least five countries are beginning to restrict vehicle fuel distribution, alongside school closures and other conservation measures.

The high prices are also starting to hit businesses. From small mining operations to the fisheries sector, many businesses are forced to reduce operating hours due to inadequate diesel stocks. Several plastic factories