The renewed U.S.-Iran fighting is colliding with an energy market that was already teetering at the edge of disaster. The ceasefire’s collapse over the recent days has again largely shut the Strait of Hormuz, ending a brief surge in shipments earlier in the month. One oil trader told the Financial Times that the market has “burned through all of the buffers we had. Everything.” Amrita Sen, director of market intelligence at Energy Aspects, told the paper that the roughly 400 million barrels of excess commercial inventory that the global market had at the beginning of the year has shrunk to next to nothing.
Government reserves are thinning too. The International Energy Agency said Friday its member countries have already released nearly three-quarters of the 400-million-barrel coordinated emergency stock release announced in March, leaving only a few more weeks of supply at that rate. This overlaps with a separate, U.S.-specific drawdown: the Strategic Petroleum Reserve is now near a 1983-era low, around 320-340 million barrels of its 714-million-barrel capacity, though the Department of Energy has characterized the releases as a loan-for-repayment exchange rather than a permanent sale.
What’s different this time, the FT reported, is that traders can’t identify where replacement barrels would come from if the closure drags on for months. Brent crude prices surged past $87 Tuesday before settling near $85, up more than 10% on the week, the paper noted, indicating the growing panic.
Add to this that Ukrainian drone strikes on Russian oil infrastructure have simultaneously degraded Russia’s refining capacity, the world’s second-largest diesel exporter, tightening refined-fuel markets even further. European wholesale diesel futures rose 14% this week alone, the FT reported. Gulf producers have partly adapted, as Saudi Arabia has pushed its Red Sea exports up to roughly five million barrels a day, nearly compensating for the seven million it once sent through Hormuz—though other Gulf countries remain nearly cut off.
As Natixis analyst Joel Hancock told the FT, markets had priced in an optimistic recovery trajectory that’s now off the table absent a new round of diplomacy. A trader separately told the FT the market has “burned through all of the buffers.” This sentiment was echoed by IMF researchers, who wrote this week that the cushion which absorbed the first shock is “smaller and shrinking further,” reported Semafor.
