How the world has avoided an oil catastrophe so far

Ten weeks into the Iran war, the mystery is deepening. Every day the Strait of Hormuz remains closed, nearly 14m barrels of oil—14% of global output—are lost. At least 2bn barrels will probably disappear from this year’s total even if the strait reopens today. Yet Brent crude, at $106 a barrel, fetches much less than the $129 it hit in 2022, after Russia invaded Ukraine, and nowhere near the $150-200 analysts predicted if the Iran war dragged on.

One reason is oil traders’ perpetual optimism about a diplomatic breakthrough. “Front-month” Brent—the nearest futures contract and global benchmark—locks in a price for oil to be loaded onto tankers in roughly two months’ time. Whenever Donald Trump hints at an imminent deal, markets put off pricing in further disruption. But lately even spot prices have calmed: “dated” Brent, which tracks crude loading in the coming days, traded at $25 above front-month futures in early April; now the gap is just a few dollars (see chart 1).

Two forces explain why the panic has faded. First, non-Gulf producers have turbocharged exports. Net of imports, in the four weeks to May 10th Canada shipped 400,000 more barrels per day (b/d) of crude and refined products than a year earlier. Venezuela and Norway each added 200,000 b/d; Brazil, 100,000 b/d. Most remarkably, America put on 3.8m b/d, according to Vortexa, a ship-tracker; at nearly 9m b/d, its net petroleum exports in those four weeks were the highest ever (see chart 2).

America’s export machine took a few weeks to crank up. New contracts had to be signed; extra barrels produced or drawn from reserves; pipelines booked; the right oil blended. In March freight rates from the Atlantic to Asia and Europe jumped to lure more tankers to those routes. To compensate buyers, the discount on West Texas Intermediate, America’s flagship crude, relative to Brent and Dubai (the Asian benchmark) broke records.

The tide of non-Gulf barrels narrowed the supply gap to roughly 8m b/d. Enter the second force: in the same four weeks big oil-buying regions imported 11m b/d less petroleum than a year before. China’s purchases alone dropped by 6.6m b/d (see chart 3). The country’s refiners have even resold some cargoes they had pledged to buy from west Africa and beyond to other Asian buyers.

The fall in imports is not good news. Some of it reflects demand destruction. Crude shortages have forced refiners in Asia and Europe to cut throughput by nearly 4m b/d. The loss of 4.4m b/d of refined products from the Gulf has pushed prices of diesel, gasoline and jet-fuel up by 60-120%. Squeezed consumers have cut back. Many petrochemical plants, starved of naphtha, a crucial plastics feedstock, are running below capacity.

Yet most estimates of demand destruction fall below 5m b/d, suggesting much of the drop in imports reflects caution not privation. Some buyers, too, may believe the strait will reopen soon and are deferring purchases until prices fall. The surprising result is a mini-glut of crude. That is keeping the Brent price down.

How long can it last? Satellite imagery suggests China’s onshore stocks have barely budged, implying refineries have slashed throughput. But crude imports have collapsed so far that this cannot be the whole story. Martijn Rats of Morgan Stanley, a bank, suspects crude once held in underground caverns has moved above ground, covering the shortfall.

Such drawdowns are likely to accelerate. Soon Chinese refineries’ maintenance season will end. They may increase exports, now the government has loosened a ban imposed in March. China has perhaps 1.2bn barrels of crude in storage: enough to keep imports depressed for much of 2026. But “strategically, they don’t want to draw down everything this year,” says Neil Crosby of Sparta Commodities, a data firm. That means China importing more, and the rest of the world less.

America may present a bigger problem. Its exports are now likelier to fall than rise. As in China, refiners’ maintenance season will soon end, and more than 500,000 b/d now earmarked for export could be redirected, estimates Kpler, another data firm. More worrying, motor-fuel stocks are plummeting at record speed (see chart 4). If this continues, even a modest rise in crude prices could push petrol to $5 a gallon—a threshold last breached in 2022, when it hurt both drivers and Joe Biden’s approval ratings.

Mr Trump’s administration is therefore mulling a ban on refined-product export. When Brent hovered around $100, one insider put the chances of such a ban at 35%. They will be higher now, and could cross 50% if pump prices jump by Memorial Day on May 25th, several sources say. That would roil energy markets the world over.

Ban or no ban, oil stocks will keep falling everywhere. America and China have bought the world time. It still faces a reckoning if Hormuz stays shut.■