Strait of Hormuz Closure: Understanding the Stability of Crude Oil Prices Amid US-Iran Tensions
The ongoing conflict in the Middle East and the closure of the Strait of Hormuz have triggered a significant oil supply shock, with global oil supply plummeting by 13.6 million barrels per day, according to a report from the Asian Development Bank (ADB). This decline represents approximately 13% of projected global output for 2025, surpassing losses seen in previous oil crises. Notably, the current situation has not driven crude oil prices to the extremes witnessed during the 1973 Arab oil embargo or the 1990 Gulf War when adjusted for inflation.
Brent crude prices briefly reached around $144 per barrel before stabilizing as markets adjusted. Analysts are examining why prices did not escalate as anticipated and what trends may emerge in the future.
What Has Changed This Time?
The current oil market is fundamentally different and more resilient than in past crises. In the 1970s, OPEC controlled over half of global production, which allowed it to sustain high prices. Today, non-OPEC sources, including U.S. shale and production from Brazil, Russia, and Canada, can increase output quickly, mitigating the duration and intensity of price spikes. Pranav Master, Director at Crisil Intelligence, notes that while price movements today are rapid, they are less persistent compared to the past.
Sourav Mitra, Partner at Grant Thornton Bharat, points out that the oil intensity of global GDP has decreased by over 50% in the last five decades. This shift is due to the rise of service-oriented sectors, fuel efficiency mandates, and the integration of alternative energy sources, making economies less reliant on crude oil.
Major Oil Supply Disruptions: Where Oil Supply Losses Stand
Despite the significant supply disruptions, not all Middle Eastern oil exports were halted. Some producers found alternative routes to bypass the Strait of Hormuz. For instance, Saudi Arabia increased shipments from Red Sea terminals, and the UAE utilized Fujairah for exports. The ADB report indicates that U.S. crude exports reached a record 5.6 million barrels per day in May, while a temporary waiver of sanctions on Russian oil shipments further expanded access to alternative supplies.
The diversification of global oil supply has also reduced dependence on OPEC members. Master emphasizes that a larger share of global crude production now comes from non-OPEC producers, enhancing the market’s ability to respond to price increases. Additionally, China’s rapid transition to electric vehicles and high-speed rail has dampened its incremental demand growth, allowing it to act as a stabilizing force in the market.
Role of Strategic Reserves
Strategic petroleum reserves play a crucial role in stabilizing the market during disruptions. IEA member countries are mandated to maintain emergency oil stocks equivalent to at least 90 days of net imports. These reserves enable coordinated releases during major supply disruptions, easing immediate pressures and calming market sentiment. The ADB report notes that the historic coordinated action by IEA members in 2026, which released 400 million barrels of emergency oil stocks, was vital in countering severe supply losses from the Middle East conflict.
Mitra explains that these strategic stockpiles help offset supply deficits and reassure traders about managing physical shortages. Elevated commercial inventories also acted as a buffer against short-term disruptions, reducing panic buying and speculative price pressures.
Economies Less Exposed
During the Russia-Ukraine conflict, IEA member countries released 240 million barrels, the largest coordinated action at that time, which helped alleviate immediate supply concerns. As non-OPEC output increased and global demand softened, the market gradually moved back toward balance. However, these releases are temporary solutions, and long-term stability relies on the recovery of physical supply and market adjustments.
China Acts as a Shock Absorber, Market Expectations Help
China’s muted oil demand has also contributed to market stability. By utilizing its domestic stockpiles, China reduced its seaborne import demand during critical periods. Mitra notes that the combination of Western IEA liquidity injections and non-Western inventory management prevented localized panic buying, showcasing the effectiveness of global inventory coordination.
The ADB report highlights that while spot prices surged as refiners competed for immediate supplies, longer-dated futures rose by much less. This dynamic allowed oil to flow into the spot market, easing pressure on immediate supply.
Is There No Fear of Oil Touching $200?
Analysts believe that the chances of crude oil prices reaching $200 per barrel due to future disruptions are low. Master states that the flexibility and resilience of global oil markets have increased, making such extreme price levels less probable. He adds that elevated oil prices tend to accelerate the adoption of alternative technologies, further reducing dependence on oil.
What If the Hormuz Closure Extended for Longer?
While the global economy is less vulnerable to oil supply shocks, the duration of disruptions is critical. The ADB report warns that if the closure of the Strait of Hormuz were to persist, the factors currently restraining prices may not hold. Global inventories have already declined by about 330 million barrels from March to May as governments and refiners drew down stocks.
Experts suggest that a prolonged disruption would lead to significant adjustments in the global energy system. Major importing economies would likely implement emergency demand-management measures and prioritize critical industries.
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