The International Energy Agency (IEA) expects that despite the anticipated signing of a memorandum of understanding between the United States and Iran this week, a full restoration of traffic through the Strait of Hormuz — a globally critical energy transport artery — will still take several months.
The IEA projects that global oil demand will decline by 1.1 million barrels per day this year, a sharp downward revision from the previously forecast decline of 420,000 barrels per day, due to high oil prices and severely disrupted supply.
This strait normally carries about one-fifth of the world’s oil and natural gas shipping volume. Market participants generally believe that a full recovery in shipping could take several months due to factors such as vessel scheduling, port congestion, security assurances, and insurance arrangements.
On the supply side, the IEA expects global oil supply to decline by 3.9 million barrels per day to 102.4 million barrels per day this year, as about one-fifth of the world’s oil supply remains trapped in the Persian Gulf region. However, global oil supply is projected to rebound sharply by 8 million barrels per day to approximately 110 million barrels per day next year. In May this year, global crude oil production had fallen to 94.5 million barrels per day, 13.6 million barrels per day lower than pre-war levels. Gulf oil producers’ exports remain under sustained pressure, but as shipping gradually recovers, supply is expected to rebound strongly next year. Iranian exports have been severely hit by U.S. sanctions, with its oil exports falling by 1.4 million barrels per day to only 230,000 barrels per day. However, part of the loss has been offset by an increase in ship-to-ship transfers in the Gulf of Oman. This transfer method is often used to conceal the origin of crude oil, and the scale of such transfers rose notably in May, reaching a peak of 1.8 million barrels per day in early June. The IEA also noted that strategic petroleum reserves held by governments of OECD member countries fell by 163 million barrels, reaching their lowest level since December 1990. Despite months of supply disruptions, declining global inventories have to some extent curbed further upward pressure on oil prices. Weakening global demand, slower Chinese crude imports, rising U.S. exports, and increased use of overland pipelines by Saudi Arabia and the UAE for crude transportation have collectively eased market pressure, partially offsetting the impact of the supply gap.
