Key facts
- A US-Iran agreement to end their war and reopen the Strait of Hormuz has been announced.
- ECB President Christine Lagarde welcomed the deal, but officials cautioned against expecting immediate inflation relief.
- Restoring oil and gas production to pre-war levels is expected to take months, with some capacity potentially taking years to return.
- Millions of barrels per day of oil output were shut due to the Strait's closure, with refining capacity also impacted.
- Global oil inventories have significantly dwindled, and rebuilding them to normal levels is projected to be a prolonged process.
A tentative agreement between the U.S. and Iran to end their war and reopen the Strait of Hormuz has been announced, a development welcomed by ECB President Christine Lagarde. However, industry officials and analysts caution that a full recovery of oil and gas supplies to pre-war production and refining levels will take weeks, months, or even years.
Millions of barrels per day of crude oil output were shut down due to the effective closure of the Strait of Hormuz, which is a major shipping route for global oil and gas. While some production, such as in Iraq, can resume in less than a week, other fields will take considerably longer. Analysts suggest that affected fields could reach 70% of prior production within three months and 90% within six months, with the final million barrels per day taking significantly longer.
Furthermore, the conflict had shut as much as 3.52 million barrels per day of refining capacity, with some plants damaged. Returning precautionary shutdowns may take a couple of weeks, but repairing damaged sites will extend the timeline. Gulf refineries are expected to reach 90% to 95% of capacity within 40 to 60 days. Major liquefied natural gas facilities also halted or curtailed operations, and while a restart can take around two weeks to reach full capacity, some estimates suggest a significant portion of Qatar's LNG capacity could be lost for up to five years.
Consequently, global oil stocks are dwindling, and a return to normal levels is projected to be prolonged, potentially taking years. Global oil inventories have shrunk by more than 1 billion barrels since the conflict began, and markets may face a prolonged 'hangover' as governments aim to rebuild inventories and insulate themselves from future geopolitical shocks.