The World Escapes an Oil Apocalypse: Who is the Driving Force Behind It?
The conflict between the United States and Iran has entered its tenth week, yet a major mystery persists in the global oil market. According to The Economist, the Strait of Hormuz remains closed. With this vital route impassable, nearly 14 million barrels of oil, or approximately 14% of global production, are being removed from the market daily. Taking into account production and shipping delays, it is estimated that at least 2 billion barrels of oil could vanish from total supply this year, even if the Strait of Hormuz were to reopen today.
The issue is that a reopening of the Strait of Hormuz does not appear imminent, as negotiations between the US and Iran have shown no significant progress. However, Brent crude prices have remained around US$107 per barrel. While high, this is well below the US$129 level reached in 2022 following the Russian invasion of Ukraine. Furthermore, prices have not met the previous projections of analysts, who feared that a prolonged Iran war could send prices soaring to the US$150-200 range.
One reason prices have not surged higher is that the market still holds hope for a diplomatic resolution. The front-month Brent contract, a key global benchmark, reflects prices for oil to be loaded onto tankers in the next two months. Signals from US President Donald Trump suggesting a potential resolution have prevented market participants from fully pricing in the risk of prolonged supply disruptions. Additionally, the premium for immediate delivery, known as Dated Brent, has narrowed significantly from a US$25 premium in early April to just a few dollars.
Two major factors have helped ease market panic. First, oil-producing nations outside the Gulf region have significantly ramped up exports. Small producers have also increased supply: Canada added approximately 400,000 barrels per day (bpd) of crude and refined products, while Venezuela and Norway each added around 200,000 bpd, and Brazil added about 100,000 bpd. However, the most striking increase came from the United States. According to Vortexa data, US net exports reached nearly 9 million bpd during a four-week period ending 10 May, an all-time high and 3.8 million bpd higher than the same period last year.
The US export engine did not move instantly; it took several weeks for the additional supply to reach global markets due to the complexities of securing new contracts, managing production, and reserving pipeline capacity. To attract buyers, West Texas Intermediate (WTI) was sold at a record discount against Brent and Dubai. These efforts helped narrow the global supply deficit to approximately 8 million bpd.
Surprisingly, global oil imports have also dropped sharply. In the four weeks leading up to 10 May, major buying regions imported 11 million bpd less than the previous year. The largest decline came from China, where imports plummeted by 6.6 million bpd. Rather than purchasing all available international crude, Chinese refineries even resold cargoes previously promised from West Africa and other regions to other Asian buyers. This drop in imports reflects weakened demand due to price and supply pressures, forcing refineries in Asia and Europe to cut production by nearly 4 million bpd. Consequently, the loss of 4.4 million bpd in refined product exports from the Gulf has driven diesel, petrol, and aviation fuel prices up by 60-120% globally, far outpacing the 40% rise in crude prices.