The global oil market has experienced a tumultuous period since late February, marked by the largest supply disruption in history caused by events in the Strait of Hormuz. Surprisingly, the industry’s price response to this upheaval has remained relatively stable, indicating a remarkable resilience supported by several pre-existing market buffers. Initially, these buffers allowed the market to absorb the shock effectively; however, the situation has evolved drastically, and the current state of the oil market no longer resembles that of just a few weeks ago.
According to Paola Rodriguez-Masiu, Chief Oil Analyst at Rystad Energy, the oil market’s initial reaction was merely an absorption of the disruption rather than an underreaction. The four-week stretch of stability, marked by a loss of 17.8 million barrels per day from the Strait of Hormuz—14.2 million of which is crude and condensates—was facilitated by pre-war surpluses and other strategic policies. However, with these buffers now diminishing, particularly as spare production capacity remains largely confined to regions affected by the disruption, the situation has become fragile.
European refiners are likely to face immediate repercussions as they will increasingly compete with Asian buyers for the available Atlantic Basin barrels. The loss of supply, combined with a depletion of inventories, suggests that any further disturbances, regardless of origin—be it an outage in the CPC pipeline through Russia, an active hurricane season, or damage to critical infrastructure—will hit markets lacking capacity to absorb shocks. The existing market dynamics indicate that the gap between routine supply events and significant price changes is now alarmingly narrow.
Before this crisis unfolded, analysts anticipated a crude oil surplus of about 3 million barrels per day for the year, supported by abundant inventories and localized spare production capacity. This foresight enabled the market to cope with previous shocks more adequately, but such buffers have now been exhausted. Nearly 500 million barrels of liquids have already been lost due to the ongoing disruption. Despite coordinated responses, including strategic petroleum reserve (SPR) releases by the International Energy Agency, the response volume has not been sufficient to match the loss rate.
Current release rates from these policy actions are notably slower than the 17.8 million barrels-per-day shortfall. Historically, total IEA flows have struggled to sustain above the 2 million barrels per day mark, implying limited deliverable volumes in the immediate future. Additionally, the IEA’s interventions primarily target its member countries, excluding major economies like Pakistan and India which have been notably affected but do not access the IEA’s reserves. China’s strategic reserves remain largely untapped, while India’s reliance on Russian crude in floating storage is also dwindling.
Moreover, the duration of the supply chain disruptions has compounded the situation. Even as the throughput from the Strait of Hormuz has been interrupted for nearly four weeks, global oil arrivals did not show significant declines until recently. This inertia can be likened to the demand disruptions experienced during the early days of the COVID-19 pandemic, but working predominantly from the supply side, leaving fewer policy options to counteract fallout.
With the current supply chain challenges, the previously existing buffers—made up of oil already in transit, floating storage, and SPR releases—are being rapidly depleted. The situation has become critical, highlighting the need for vigilance in market response.
As European buyers quickly recognize the intensifying competition for available barrels, price differentials are starting to shift. The looming question remains: how will the oil market react when the next disruption inevitably occurs? With each passing day, the urgency of this situation increases.
