When the Strait of Hormuz tightens, many are bracing for $200 a barrel of oil. More than three months have passed, and the nightmare scene still has not appeared.The disruption removed more than 10 million barrels per day of Middle Eastern supply from the market, prompting warnings of crude prices surging to $200 a barrel. Instead, oil prices have remained below the $100 mark, supported by a combination of stronger U.S. exports, weak Chinese demand and alternative supply arrangements.“People thought it could be worse,” President Donald Trump said Friday. “Today I saw $96 a barrel and people thought it was going to be $300 a barrel.” Iran has tightened its noose around the crucial Strait of Hormuz after the United States and Israel launched a joint strike against Iran. The blockage disrupted oil supplies around the world as the channel carries 20% of the world’s energy supplies. As a result, crude oil prices surged to over $125 a barrel from $70 earlier. Now, fuel prices are hovering around $100 a barrel, well below analysts’ forecasts.Here are the reasons why crude oil prices have failed to break the $200 mark:
Travel to Hormuz and beyond
Persian Gulf oil producers have sought alternative routes to sustain exports. Saudi Arabia has rerouted crude to the Red Sea via its East-West Pipeline, while the United Arab Emirates uses a pipeline to Fujairah beyond the Gulf.Despite the risks, some ships continue to use the Strait of Hormuz. According to shipping data, the number of ships crossing the border per day has dropped to two or three from nearly 100 before the conflict. However, Bloomberg reported a much higher number, citing an official familiar with U.S. Central Command operations, saying nearly 1,000 commercial ships had transited the waterway in the past two months.“I think it would be unrealistic to see at least an average of 20 ships a day for a full week in a ‘meaningful recovery’ before a durable U.S.-Iran settlement is reached, which is continually delayed,” said Raymond James analyst Pavel Molchanov.
Restrict and reroute oil flows
Meanwhile, inbound shipments to China, the world’s largest oil importer, fell nearly 40% in May from last year’s average, data from Vortexa Ltd. showed. This decline has helped offset a large portion of the oil lost to the conflict.Analysts attribute the slowdown in part to the country’s decision to stop expanding strategic reserves. Increased use of coal in chemical production and the spread of electric vehicles are also putting pressure on oil consumption.Kpler and Energy Aspects Ltd. estimate that Chinese refineries produced about 13 million barrels per day in May and June, compared with an average of 14.8 million barrels per day last year.“China’s exit from the crude oil market has played a crucial role in trying to rebalance global markets, which has helped cap oil prices,” Warren Patterson, head of commodities strategy at ING Groep NV in Singapore, told Bloomberg. “The extent of it surprised most markets.”At the same time, the United States has also increased its export efforts. U.S. crude oil and fuel shipments in May were more than 2 million barrels above the average for all of last year.“This conflict has lasted for more than three months and the world has proven to be amazingly resilient,” Angelicoussis Group CEO Maria Angelicoussis said in a speech this week. “Commodity prices are up 50% or 60%, Asian LNG prices are up 90%, but at least not to the sky-high levels that I personally expected.”The United States, which relies heavily on its status as a major energy exporter to prop up the market, pledged to release 172 million barrels from the strategic oil reserve. Nearly half of the released barrels have been shipped overseas, including to Europe.Expectations that a diplomatic solution remains possible also weighed on market sentiment. Traders became cautious about maintaining large bullish positions, with open interest in Brent crude futures falling to the lowest level since August.At the same time, the chaos in the Middle East that began on February 28 continues to put pressure on the oil market and has lasted for nearly 100 days.
