Seven weeks after the war in the Middle East began, the world has already lost 500 million barrels of oil supply, equal to around $50 billion at an average price of $100 per barrel, around which futures prices have been hovering since February 28.
The losses are enormous and continue to pile up as traffic through the Strait of Hormuz, where 20 million barrels per day of oil supply moved before the war, remains severely restricted, and tensions in the region escalated again.
Even if traffic were restored today at full capacity, oil and LNG supply will take months, and in some cases, years, to recover as all Middle Eastern producers have been forced to curtail upstream production and refinery operations due to hits on energy infrastructure and inability to move oil and LNG cargoes through the Strait of Hormuz, which is the only route to international markets for some of these producers.
500 Million Barrels of Oil Off the Market
Six weeks after the war began, cumulative crude and condensate supply losses in the Middle East had reached 430 million barrels as of April 10, data by Kpler showed.
The analytics firm estimated that Middle Eastern crude supply plunged by an average of 9 million barrels per day (bpd) in March compared to February levels, with a significant portion of the drop driven by Saudi Arabia.
At the end of the seventh week, the cumulative supply loss from the Middle East reached 500 million barrels, per Kpler data. This means a total revenue loss of about $50 billion with oil prices averaging around $100 per barrel since the war began, Johannes Rauball, a senior crude analyst at Kpler, told Reuters.
To put the huge supply loss into perspective, 500 million barrels are equal to almost a full month of oil consumption in the U.S., or more than a month of oil demand in all of Europe, per Reuters estimates.
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With so much supply out of the market, inventory draws are accelerating. Kpler said last week that crude markets are tightening with onshore inventories falling by 41 million barrels by mid-April, signaling a drawdown rate of 2.7 million bpd.
“The shift follows the exhaustion of earlier supply buffers and peaks in regional shut-ins,” Kpler’s analysts noted.
“Continued constraints on flows via the Strait of Hormuz suggest further inventory pressure ahead, reinforcing a tightening physical balance.”
Global oil supply plummeted by 10.1 million bpd to 97 million bpd in March, in the largest disruption in history, the International Energy Agency (IEA) said in its monthly report published last week.
Global observed oil inventories fell by 85 million barrels in March, with stocks outside of the Middle East drawn down by a significant 205 million barrels (or by 6.6 million bpd) as flows through the Strait of Hormuz remained choked off, the IEA has estimated.
“Resuming flows through the Strait of Hormuz remains the single most important variable in easing the pressure on energy supplies, prices and the global economy,” said the agency.
Days after this report was published, the Strait of Hormuz was briefly open for a few hours, but then tensions escalated again, and the world’s most critical oil chokepoint was closed off again. The narrow window of open Strait did not change market balances as few tankers managed to pass Hormuz.
The Strait remained mostly closed as of April 21.
Slow and Lengthy Recovery
Even if it were to open to free, safe, and unconditional traffic for all vessels as early as today, global oil supply will need months – and possibly years in some cases – to recover to pre-war levels, analysts warn.
This implies that disruptions and oil price volatility will continue for months to come, even if the Strait of Hormuz opened to unrestricted traffic today.
Earlier this month, energy consultancy Wood Mackenzie said that an estimated 11 million bpd of upstream production shut-in across the Middle East can only be restored when export logistics normalize with an open Strait of Hormuz.
Even unconstrained, it will take countries like Iraq a long time to reach prior production levels—as long as between 6 and 9 months—given the complexities involved, due to both reservoir management and resource constraints, said Fraser McKay, Head of Upstream Analysis at WoodMac.
A recovery of LNG supply would take even longer, considering that Qatar has signaled that the damage from Iranian missile strikes to the Ras Laffan LNG complex, the world’s single largest LNG-producing facility, would cost it about $20 billion per year in lost revenue and take up to five years to repair.
The Middle Eastern producers may need up to two years to restore their oil and gas output to the levels from before the war, the IEA’s executive director Fatih Birol said last week.
“This gap is now becoming apparent,” Birol told Swiss newspaper Neue Zürcher Zeitung in an interview published on Friday, referring to the fact that there weren’t any loadings and shipments of oil and gas to Asia in March.
“If the Strait of Hormuz is not reopened, we must prepare for significantly higher energy prices,” Birol said.
By Tsvetana Paraskova for Oilprice.com
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