Safety margin of the oil market in the context of the Hormuz crisis

Alexey Gromov, Principal Director on Energy studies at the Institute for Energy and Finance, wrote an author's column "The oil market in the midst of the Hormuz crisis — how can shortages be avoided and where are the limits of strength?" for the Internet portal "Sovereign Economy".

The oil market has not yet shown clear signs of demand disruption, despite the development of the crisis in the Strait of Hormuz. Too little time has passed for consumers to switch to austerity mode, and the market is still maintaining the current price level, with the exception of the aviation kerosene segment. Alexey Gromov shared these observations.

The expert called the reduction in production in the Persian Gulf countries, which has already exceeded 10 million barrels per day, a key negative factor. Since a significant part of this volume is export-oriented, we are talking about direct losses for the global market.

Gromov explained that compensation for these losses comes from several sources. The first of these is strategic reserves. At the beginning of the crisis, the International Energy Agency announced the release of 400 million barrels, and this process continues. The analyst suggested that the global reserves would theoretically be enough to mitigate the effects of the blockade for about six months. The total reserves of the IEA countries reach 1.2 billion barrels, while China is estimated to have accumulated 1.3 billion barrels. At the same time, as the expert clarified, data on the consumption of Chinese reserves are not disclosed.

However, even with the necessary decisions, it is impossible to bring such volumes to the market instantly due to lengthy sales, contracting and logistics procedures. In addition, the distribution of stocks is extremely uneven. In the case of a prolonged blockade, this will lead not to global, but to local deficits, primarily in Asian countries. Europe, which received relatively little oil from the Persian Gulf, will face mainly a price shock.

The expert named alternative export routes as the second compensation channel. Pipelines in Saudi Arabia and the UAE have already been loaded to full capacity. The main build-up reserve is associated with an oil pipeline from northern Iraq to the Turkish port of Ceyhan. In May, pumping along this route is planned to increase to 500 thousand barrels per day – more than double the pre–crisis level, and in the future - up to 1 million barrels per day.

Additional sources are the remnants of unrealized oil in tankers and the growth of supplies from other regions, including West Africa, Brazil, the United States and Canada. So, in April, the latter provided an additional 500 thousand barrels per day, and in May this figure may double.