Jon Butcher, Senior US Economist, at Aberdeen outlines potential sources of offsetting oil supply that could come to the physical market in the short-term;
“Financial markets remain caught between worsening conditions in the physical oil market and hopes of offsets and an end to the conflict. Our view remains that short-term risks are still generally underestimated, even as we stick to our baseline of an end to the conflict over the next two weeks or so.
It is evident that if the Strait of Hormuz cannot be at least partially reopened soon, the disruption to global oil supply is too large to feasibly be offset through other means. For context, the OAPEC cuts in the 1973 lasted for five months and were ~ 5mbd, 8-9% of global supply at the time. That caused the price of oil to quadruple.
While the release of reserves will provide some relief to the physical oil market, this was presumably already largely incorporated into pricing. In any case, it does not offset the loss of supply if the strait remains largely closed.
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We’ve attempted to quantify the various potential sources of offsetting oil supply that could come to the physical market in the short-term.
Accounting for increased utilisation of export facilities outside the Gulf, IEA reserve releases, a halt to China’s stockpiling, some Iranian exports to China, and a potential lifting of sanctions against Russia, this could offset perhaps 11 mbd of the 19.4 mbd that was flowing through the strait prior to March.
There is a high degree of uncertainty around some of these numbers. Saudi Red Sea supply could be less if Houthi attacks disrupt rerouting. China could release more stockpiles. A successful naval convoy through the strait could increase supply. And US shale may eventually increase output, although the spin-up times are months not days.”
