As prices for physical crude oil hit all-time highs of over $160 per barrel last month, analysts and traders alike rushed to predict a market Armageddon if the U.S.-Iran war dragged on and the Strait of Hormuz stayed closed.
Five weeks later, with the strait still largely shut and peace talks at an impasse, prices have not risen but have instead fallen to $100-$110 a barrel. The fall was driven by several factors: Chinese refiners slashed refining runs and also reduced imports and instead used crude from their storage tanks. Producers, refiners and traders exported more oil and fuel from the United States to global markets to help plug the gap in supply from the Middle East.
Around 20% of global energy supplies transited the Strait of Hormuz before the war, and the conflict has removed 14 million barrels per day of oil – or 14% of global supply – from the market from suppliers such as Saudi Arabia, Iraq, the UAE and Kuwait. The war has stoked inflation, slowed the global economy and triggered demand destruction – when high oil prices force consumers to cut purchases.
“The fact that prices remain at relatively subdued levels, despite what is arguably the largest supply disruption in modern history, suggests that demand destruction is proving stronger and more widespread than expected,” said Saxo Bank analyst Ole Hansen.
Middle Eastern crude grades Oman, Dubai and Murban priced at around a $9 per barrel premium to the Dubai benchmark this week, according to data from General Index, down from record high premiums of over $65 per barrel in March. That gave outright prices of around $104 per barrel, down from nearly $170 per barrel in late March. U.S. Permian-quality crude at the Magellan East Houston (MEH) terminal fell to a $1.20-a-barrel premium to U.S. crude futures on May 15, in line with pre-war levels. U.S. flagship offshore grade Mars Sour traded at a $4-a-barrel premium, down from a six-year high of $17.50 on April 1.
U.S. crude exports to Europe are also weighing on the Atlantic basin grades. North Sea Forties crude traded at a small discount to dated Brent on May 12, versus an all-time-high $21.50 premium in April.
Prior to the start of the war on February 28, physical crude price benchmarks such as Dubai and Dated Brent were hovering around $70 per barrel.
CHINA REFINES LESS, USES STOCKPILES
The scale of the Chinese oil industry’s reaction to the crisis has been remarkable, analysts from Morgan Stanley said in a note. Chinese refiners reduced production by almost a fifth from pre-war levels to around 8.4 million bpd, either bringing forward the dates for scheduled maintenance or cutting fuel runs.
China’s net seaborne crude imports fell by 5.5 million bpd – or 5.5% of global demand – from year-ago levels to 8.5 million bpd in the 30 days to May 8, the bank said. Chinese refiners even resold cargoes they had bought under long-term contracts to refiners in other countries – something they rarely do – amid weak domestic fuel demand and high crude prices that made resales profitable. In the whole of Asia, home to 37% of global refining output, oil imports fell to a 10-year low in April as refiners also opted to process stocks accumulated at cheaper prices before the war.
Asian crude processing will drop 5.6% to 28.7 million bpd in May from March, according to Energy Aspects data. As refiners worldwide process more oil from inventories to avoid paying higher prices in an undersupplied market, global oil inventories fell at a record pace of 246 million barrels in March and April combined, the International Energy Agency said, to 7.952 billion barrels. OECD Asia and Oceania crude stocks fell 12% to 451 million barrels in May from pre-war levels in February, according to Energy Aspects data.
“No one wants to pay for the next expensive barrel. Everyone’s waiting in hope, but at some point all these inventories are going to run out,” Energy Aspects analyst George Dix said.
U.S. EXPORTS HIT RECORDS
Producers and traders have cranked up exports from the United States, the world’s biggest oil producer. The U.S. government has also sold 133 million barrels from its Strategic Petroleum Reserve.
U.S. exports of crude and fuel rose to 13 million bpd in the first two weeks of May from 11.2 million bpd in March, according to the Energy Information Administration.
Exports of crude oil from the SPR stood at around 308,000 bpd in April and 281,000 bpd so far in May, Kpler data showed. Analysts warned the relatively lower prices may be unsustainable and that stocks would drop to minimum levels if Hormuz does not reopen in the next couple of months.
Refiners will need to resume purchases to keep fuel markets supplied, which would push prices up again, said BNP Paribas analyst Aldo Spanjer. “The market has shown a lot of resilience, but it is running by drawing on inventories while awaiting a breakthrough on Hormuz,” said Adi Imsirovic, non-resident senior associate at the Center for Strategic and International Studies, and a veteran oil trader.
(Reporting by Robert Harvey and Ahmad Ghaddar in London, Arathy Somasekhar and Georgina McCartney in Houston, Siyi Liu in Singapore; Editing by Dmitry Zhdannikov, Simon Webb and Nia Williams)