Oil Market Disruptions from the Strait of Hormuz Closure
The paper oil futures market seems to be underestimating the significant disruptions caused by the closure of the Strait of Hormuz, which is impacting global crude oil and fuel supplies.
Earlier this week, crude oil futures briefly surged to $119 per barrel but have since dropped back to the $90 range, trading around $100 per barrel in early Friday morning trading in Asia.
In contrast, the premium for physical Dubai crude has soared to $38 per barrel over paper crude, according to data from a Reuters analyst.
This substantial difference between paper and spot prices indicates that immediate supply shortages are becoming evident.
Yet, traders in the paper market appear to hold onto the belief that high emergency inventory releases and government assurances that the conflict will soon end will mitigate upward pressure on oil prices.
Analysts are starting to think that the possibility of $200 oil is no longer far-fetched. With around 20% of the world’s oil supplies trapped in the Strait of Hormuz, buyers are battling to secure physical cargoes. Asian refineries are even contemplating lowering processing rates, and several Asian countries are imposing restrictions on fuel exports.
Consequently, jet fuel and diesel prices have skyrocketed, leaving regions like Europe facing serious shortages in middle distillates.
Just hours after announcing a coordinated emergency release of 400 million barrels of oil—marking the largest in history—the International Energy Agency (IEA) cautioned that the ongoing conflict is causing unprecedented supply disruptions in the oil market.
However, the IEA’s coordinated releases may take weeks or months to hit the market. Commodity strategists at ING, Warren Patterson and Ewa Mansey, suggest that the release of U.S. stock as part of this action might take about 120 days to complete.
“If other countries follow a similar timeline, that translates to 3.3 million barrels per day, which is significantly less than the supply loss from the Gulf,” they observed.
According to the IEA, Gulf oil producers have already reduced crude oil production by at least 10 million barrels per day, as storage facilities are at capacity and there’s limited production to navigate through the crucial Strait of Hormuz.
Moreover, over 3 million barrels per day of refining capacity in the Gulf has been shut down due to attacks and a lack of viable export points.
The IEA emphasized, “Operations elsewhere will increasingly be restricted due to raw material availability.”
This coordinated stock release, the biggest since the IEA’s inception in the 1970s, is unlikely to bolster supplies in much of Asia, as neither China nor India—dominant oil importers—are IEA members. While China has a buffer to weather some of the supply disruptions, India’s stockpiles are among the lowest in the region.
The U.S. Treasury has authorized purchases of floating storage for Russian crude oil in tankers until April 11. There’s likely going to be fierce competition between China and India for this supply, but it probably won’t sufficiently counteract the substantial loss from the Middle East, where much of the oil is headed to Asia.
Sushant Gupta, Research Director at Wood Mackenzie, noted, “Asia’s alternative sources of oil supply are quite limited, and both China and India are vying for Russian crude oil.”
He added that “Asia’s refiners will struggle to meet crude purchase requirements for April, resulting in production cuts across the region as they dip into buffer stocks.”
“If the conflict persists, many nations will eventually need to rely on their strategic oil reserves.”
Despite efforts by the Trump administration to ease market fears and downplay the rise in oil and gasoline prices, the conflict doesn’t seem to be winding down anytime soon.
Earlier this week, Wood Mackenzie analysts predicted that Brent crude oil prices could skyrocket to $150 per barrel in the coming weeks. They pointed out that unlike during Russia’s invasion of Ukraine in 2022, when supplies were flowing freely, the current crisis involves a larger and more tangible supply issue.
They concluded, “In our view, $200 per barrel is within the realm of possibility in 2026.”
Energy Secretary Chris Wright, in an attempt to limit the impact on prices, acknowledged that oil prices are climbing but remarked it’s “unlikely to reach $200,” adding that the administration is concentrating on military operations and problem-solving.
At the same time, he noted that the U.S. Navy isn’t prepared to start escorting oil tankers through the Strait of Hormuz yet.
While the paper market is reacting to reassurances and comments, the physical oil market is revealing signs of tension as large portions of the global oil supply have been offline for weeks, or even months.
