THE United States is rapidly running out of shock absorbers to cushion the oil market from the loss of Middle Eastern crude supplies as the Iran war rages, raising the risk of a deeper global economic slowdown if demand destruction accelerates.
As the US-Israeli war on Iran enters its third week, at least 15% of the world’s oil supplies remain effectively trapped inside the Gulf following the closure of the Strait of Hormuz, the region’s vital maritime chokepoint, according to Reuters calculations.
Saudi Arabia, the world’s largest oil exporter, is scrambling to divert as many as five million barrels per day (bpd) to the Red Sea port of Yanbu.
The United Arab Emirates is also diverting some extra crude exports through the Fujairah oil terminal.
Even so, roughly 15 million bpd of Middle Eastern supply remains shut out of global markets – a disruption without precedent in the post-World War II era.
The shock has pushed Brent crude above US$100 a barrel, while global prices for refined fuels such as diesel and jet fuel have surged even more sharply, reflecting fears of sustained shortages.
Iran’s new Supreme Leader Mojtaba Khamenei has said the Strait of Hormuz will remain closed as Tehran seeks to exert pressure on the United States and Israel, though he has indicated that individual countries could coordinate ship movements with Iran’s navy.
Washington has acknowledged that the US Navy is currently unable to forcibly reopen the waterway.
While the United States has offered financial guarantees to insure vessels against war-related losses in an effort to restart transit, most commercial shippers appear unwilling to take the risk.
President Donald Trump has also urged allies to deploy warships to secure Hormuz alongside the United States, though any such operation remains weeks away.
In past crises, the world has typically looked to the spare production capacity held by the Organisation of the Petroleum Exporting Countries and allied producers, collectively known as Opec+.
But it is not much help in this situation.
According to the International Energy Agency (IEA), there was about 3.9 million bpd of spare capacity before the war, the overwhelming majority of which was held in the Middle East, with around 1.7 million bpd in Saudi Arabia alone.
Trying to fill the gap
The Trump administration – acutely aware of the political sensitivity of rising gasoline prices – has spent the past two weeks pulling nearly every available lever to relieve pressure on the market.
Last Thursday, Washington issued a 30-day waiver allowing countries to buy sanctioned Russian crude oil and petroleum products currently at sea.
The US Treasury had already issued a similar 30-day waiver specifically for India. The volume under discussion is significant.
Russian crude and refined products on tankers, as of March 12, totalled about 245 million barrels – roughly equivalent to the volume of Middle Eastern supplies lost so far, according to shipping analytics firm Kpler.
But the headline number overstates the likely relief, even if the waiver is extended.
China, India and Turkiye have already been buying the bulk of Russia’s oil despite Western sanctions, meaning the waiver releases far fewer incremental barrels onto the market than the total volume suggests.
The IEA has also moved aggressively.
Last Wednesday, it announced plans for its 32 members to release 400 million barrels from emergency reserves – an unprecedented drawdown equivalent to roughly one-third of total strategic petroleum reserves managed by the agency. — Reuters
Ron Bousso is a columnist for Reuters. The views expressed here are the writer’s own.
