It’s easy to dismiss the agreement by the seven remaining members of the OPEC+ group of crude oil exporters to increase output for a third straight month in June as merely symbolic.
Certainly, as long as the Strait of Hormuz remains effectively closed, the decision to lift production by 188,000 barrels per day (bpd) is largely meaningless, especially for the OPEC+ members reliant on the narrow waterway for access to global markets.
But just because the decision is symbolic, it doesn’t mean it should be ignored.
The remaining members of OPEC+ subject to voluntary output reductions are signalling that they will continue without the United Arab Emirates, that the group remains relevant and most likely believes it will continue to act as a balancing force between supply and demand.
The decision last week by the UAE to exit the Organization of the Petroleum Exporting Countries and the wider OPEC+ group, which includes Russia, was seen as a blow to the influence of the 65-year-old producer group.
It was also seen as firing the starting gun on a volume race that will flood the market when, or perhaps the better word is if, the Strait of Hormuz is fully re-opened.
Until the strait is reopened to all traffic, much of the debate around the future of OPEC+ is theoretical, and it is by no means a given that a volume and price war is the most likely outcome if the United States and Iran can reach a peace deal.
In the meantime, the impact of the ongoing closure of the waterway, through which about 20% of global crude and liquefied natural gas moved prior to the start of the Iran conflict on February 28, is becoming more apparent.
About 80% of the flows through the strait headed to Asia, the world’s top energy-importing region.
While some tankers that exited the strait prior to the start of the war would have delivered their cargoes in April, it’s clear that volumes were already starting to fall sharply.
ASIA IMPORTS PLUNGE
Asia’s imports were 19.39 million bpd in April, down from 24.48 million bpd in March and 27.52 million bpd in February, according to data compiled by LSEG Oil Research.
This is the lowest monthly total in at least 10 years and shows that the region’s refineries lost about 8 million bpd of crude compared to pre-war levels.
This may reverse slightly in May as a flood of crude from other suppliers outside the Middle East, most notably the United States, starts to arrive in Asia.
Asia’s imports of U.S. crude are forecast by commodity analysts Kpler at 2.08 million bpd in May, a record high and up from 1.10 million bpd in April.
The two biggest buyers of U.S. crude in May are South Korea, with about 865,000 bpd, and Japan with 491,000 bpd, according to Kpler.
These two countries are among the worst affected by the closure of the Strait of Hormuz, with South Korea’s April imports dropping to a 13-year low of 1.50 million bpd, as volumes that passed through the strait dropped to zero from an average of 1.73 million bpd in the three months prior to the start of the Iran conflict.
Japan’s imports via the strait plunged to just 139,000 bpd in April from an average of 2.04 million bpd in the three months before the U.S. and Israel launched their aerial campaign against Iran.
But even with a surge in arrivals from the United States, both South Korea and Japan are still importing well below pre-war levels, with South Korea’s total May imports estimated at 2.23 million bpd and Japan’s at 1.64 million bpd.
What the data is showing is that while Asia’s refiners have been able to source crude from outside the Middle East, it’s simply not enough to make up for the shortfall.
While using inventories may help in the short term, eventually refineries will be forced to further cut run rates, especially if the strait remains effectively closed.
If refineries are forced to trim output, the supply of refined products is likely to tighten further, and higher prices will be required to force demand lower.
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The views expressed here are those of the author, a columnist for Reuters.
(Editing by Sonali Paul)