World absorbs historic Iran war oil supply loss, but depleted stocks bring risks
The ensuing four-month conflict did, indeed, create the biggest energy disruption in history, according to the International Energy Agency. At its worst, the headline supply loss was 14 million barrels per day.
Summary
- Fears over gasoline and jet fuel supplies proved overblown
- Record storage releases, eased Chinese buying helped the market
- Thinned storage must be replenished, poses risk of more price spikes
The world has absorbed with surprising ease the loss of over a billion barrels of oil supply since the Iran war began, but, with long-term peace elusive and buffer reserves now drained, it still faces the looming risk of future price spikes.
Tehran's throttling of the Strait of Hormuz in response to the US and Israeli attacks launched on 28 February fed fears of a catastrophic global energy crunch.
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The ensuing four-month conflict did, indeed, create the biggest energy disruption in history, according to the International Energy Agency. At its worst, the headline supply loss was 14 million barrels per day.
But worries that Asia and Europe would run out of gasoline, diesel or jet fuel never materialised. And after peaking around $126 per barrel in April – still some $20 below the 2008 record – benchmark Brent oil prices are now lower than they were when the conflict began.
"This suggests traders viewed the disruption as serious but manageable, reflecting confidence in today's more resilient energy and economic systems," said John Baffes, senior economist at the World Bank.
Since the oil crisis of the 1970s, World Bank data shows that oil intensity – a measure of the role oil plays in economic activity – has fallen by more than half in most advanced economies and roughly 20% in emerging and developing countries.
Beyond that structural shift, however, three specific factors have been responsible for forestalling the worst-case scenario during the Gulf crisis.
Saudi Arabia and the UAE found alternative routes to export. Asia, led by China, curtailed buying. And countries around the world likely pulled around 1 billion barrels of oil from their reserves, including via an IEA-led record stocks release.
China adjustments ease global pressure
When the war broke out China had nearly 1.4 billion barrels of oil stored, according to the US Energy Information Administration. That was more than the 1.2 billion barrels held by all of the 32 members of the IEA combined, including the United States' 413 million barrels.
China's rapid electric vehicle adoption in recent years along with flexibility in oil and petrochemicals output also helped, said Ilia Bouchouev, of the Oxford Institute for Energy Studies.
"They are managing the market a lot better than (the Organization of the Petroleum Exporting Countries) used to," said Bouchouev, a former head of derivatives trading at Koch Global Partners.
The adjustments by China, the world's biggest oil importer, helped ease global demand pressure. And the IEA's scheme to release 400 million barrels of reserves provided further breathing room at a time when US President Donald Trump was repeatedly stating an end to the war was imminent.
"Traders always took the view this can't go on much longer," said Neil Atkinson, a former IEA official.
Washington's narrative management, that more supply was coming, also made hedge funds reluctant to hold long positions that bet on prices rising, Societe Generale analysts noted.
With the signing last month of a preliminary agreement to end the war, there has been a rapid swing back towards business as usual.
"The market seems to have decided that this peace deal is for real," Atkinson said.
Lost buffer risks more spikes
In reality, however, little is as it was before the war.
Even as Saudi Arabia, Kuwait, Qatar, Iraq and Bahrain resume production and exports, it will be years in some cases before they fully repair the damage to their energy infrastructure caused by Iranian attacks.
While prices may reflect expectations of a rapid return to pre-war supply levels, data on tanker traffic through the Strait of Hormuz tells a different, more pessimistic story.
And with the clock ticking on the 60-day ceasefire between Washington and Tehran, progress towards a final agreement to end the war has been achingly slow, with key questions – including the fate of Iran's nuclear programme – still unresolved.
Meanwhile, there's the mammoth task of rebuilding global oil inventories.
The global economy weathered the shock by drawing down stocks at a record pace, according to IEA data, draining the very buffers designed to protect it from supply crises.
"It doesn't mean we can't operate without one, it just means that forward prices could be more prone to spikes," Bouchouev said.
That kind of volatility is costly.
Every $5 increase in oil prices adds roughly $190 billion in annual costs to the global economy, according to Reuters calculations based on oil demand of 104 million barrels per day.
Replenishing oil stocks, never cheap, has likely been made more expensive by the war.
Before the conflict, the European Central Bank had estimated 2027-2028 oil prices at $63 to $64 per barrel. That's now risen to an average of $65 to $75, according to an ECB report published in June.
At current Brent prices, it would likely cost more than $70 billion to replace reserves drawn down to mitigate Iran war supply loss.
But until that is done, the world is operating without a safety net in an environment still fraught with uncertainty.
"The markets may be underestimating the risk of further oil flow disruptions," said Saul Kavonic, head of research at MST Marquee. "Iran is likely to continue to find pretexts to stymie flows through the strait."
