"Sunsetting" Hormuz and new routes: how the oil market learned to work in a war

The United States and Iran have agreed "in principle" on a deal that could lead to an end to the war in the Middle East and the opening of the Strait of Hormuz. Nothing is ready to be signed yet, and final approval could take several days, U.S. officials told reporters. Iran's Tasnim news agency wrote that the agreement could collapse because of "sabotage" by the US on the issue of unblocking the Islamic Republic's assets. Even before news of a possible peace agreement emerged, the oil market had already begun to narrow the supply-demand gap and suppliers had begun to establish new routes to bypass the Strait of Hormuz.

Even if the U.S. and Iran agree to resume shipping through the Strait of Hormuz, the effects of the war in the Middle East will be felt for a long time, according to oil market participants and analysts.

"While reopening the Strait of Hormuz would benefit global oil flows, the volatile progress of negotiations and unresolved differences mean that increased oil price volatility could persist for some time," Bloomberg quoted ANZ Bank analysts as saying.

On Ma 21, Bloomberg Intelligence presented a survey among 126 asset managers, analysts, traders and energy companies. It showed that two-thirds considered the average price of Brent in the next 12 months at $81-100 per barrel as a base case scenario. 56% thought the price would fluctuate within that range by the end of this year. On Friday, July Brent futures were trading around $105 a barrel. But on Monday, on the news about the possible signing of an agreement between the US and Iran, the price fell to $98.

According to the survey participants, the geopolitical risk premium embedded in the oil price is becoming a structural rather than a temporary factor. Among the respondents, 37% believed that in the next year or two it will be $6-10 per barrel, 28% - $11-15.

They appear to "assume that supply and demand will gradually come into balance, anchoring prices in a relatively stable range," Bloomberg Intelligence analysts commented.

Oil producers and the International Energy Agency (IEA) made similar assessments. "Even if this conflict ended tomorrow, it would take at least four months to regain 80 percent of pre-war supplies, and they would not fully recover until the first or even second quarter of 2027," Sultan Ahmed Al Jaber, CEO of the UAE's state-owned Abu Dhabi National Oil Company (ADNOC), said on Wednesday.

Demand after the current slump may start to grow from the third quarter if the agreement to end the war allows for a gradual resumption of supplies through the Strait of Hormuz, the IEA said in its May report. But supply will recover more slowly, and the oil market deficit will persist until the last quarter of this year: "With global [commercial] oil inventories declining at a record pace, price volatility ahead of the peak summer period is likely to persist".

Over the past month, Brent futures have bounced between $96 and over $120 a barrel.

The market will have enough commercial stocks for a few more weeks, but "we have to remember that they are shrinking rapidly," Fatih Birol, the Ma's executive director, said on May 18. They will shrink even faster due to the start of the planting season and summer tourist season in the Northern Hemisphere, increased demand for diesel and jet fuel, gasoline and fertilizers, he added.

In May, inventories had already begun to fall almost twice as fast as the average since the start of the conflict - by a record 8.7 million barrels per day, Goldman Sachs said. But at the same time, they are back to the level of a year ago, because in the nine months before the war, a "significant reserve" was accumulated due to the excess of supply over demand.

Now the imbalance between supply and demand is not as great as it seemed at first, when the closure of the Strait of Hormuz deprived the world oil market, which consumes about 105 million barrels per day, of about 20% of supplies.

Oil consumption and imports have fallen markedly, and suppliers are finding ways to increase supply by rerouting oil export routes from the Persian Gulf and increasing exports from other regions, primarily the Atlantic basin.

Cumulative market losses have already exceeded 1 billion barrels, and the IEA estimates the scale of the halted oil production at 14 million bpd: "This is an unprecedented supply shock, but the gap between supply and demand is much smaller, as the market was in surplus at the start of the crisis and producers and consumers have begun to respond to market signals."

Demand is the main "shock absorber" of the market, according to 41% of respondents surveyed by Bloomberg Intelligence. On the supply side, the situation is mitigated by supply diversion, changes in logistics, OPEC+ spare capacity and strategic reserves.

Average daily refining volumes in the world fell by 5 million barrels in April, the IEA notes, and Asian countries, the main buyers of Middle Eastern oil, drastically reduced imports compared to February: China - by 3.6 million, Japan - by 1.9 million, Korea - by 1 million, India - by 760 thousand barrels per day.

Reduced imports by China and increased U.S. exports were the main buffers that helped limit the shock from the crisis, Morgan Stanley analysts said.

What matters now is how things go from here: if shipping in the Strait of Hormuz resumes in June (this was the bank's baseline scenario as of Ma 11), the "buffers" will still be in place. If it remains closed until the end of June or even early July, the price of Brent futures, which has stabilized in recent weeks, will start to rise to further reduce demand and stimulate supply.

Producers have already found ways to increase oil deliveries. "After the closure of the Strait of Hormuz, almost all of our neighbors in the region asked us to provide access to our Syrian ports," Mazen Alloush, director of local and international relations at the Syrian Border and Customs Administration, told The New York Times.

Syria borders Turkey, Iraq, Jordan and Lebanon, and has ports on the Mediterranean Sea. Although they require millions of dollars of investment after more than a decade of civil war, endless lines of oil tanker trucks already stretch from the previously closed border crossing with Iraq, which has been quickly reopened.

Iraq had no other routes for getting oil out except through the Strait of Hormuz, and now more than 400 tanker trucks a day are now being sent to Syria at times.

Saudi Arabia, which previously exported almost all of its crude by sea from the Persian Gulf, is now pumping it through a pipeline across the country to a port on the Red Sea. According to the IEA, Saudi production amounted to 7 million bpd in April against an OPEC quota of 10.2 million.

The UAE is more than 50% complete with the construction of the second pipeline leading to the port of Fujairah, ADNOC's Al Jaber said. That port is located on the Gulf of Oman, which juts out into the ocean. As a result, al-Jaber said, the UAE will be able to double its oil exports without sending ships through the Strait of Hormuz. The existing pipeline to Fujairah already has a capacity of 1.8 million bpd.

The new one should be operational in 2027. By then, the UAE will have already left OPEC, as it announced in April.

With the new pipeline, the UAE will be able to export about 3.6 million bpd even without opening the Strait of Hormuz. This is more than their OPEC quota (3.4 million). According to the IEA, the country's total production capacity is 4.3 million bpd.

U.S. Energy Secretary Chris Wright said on Ma. 15 that after the war, the importance of the Strait of Hormuz to world energy markets would likely decline as oil-producing countries in the region build additional infrastructure to bypass it.

"This is a card that can only be played once," he said, referring to the Iranian blockade. - We will see a decline in the importance of the Strait of Hormuz, but not in the importance of energy production and supply by these countries."

This article was AI-translated and verified by a human editor