Key facts
- Oil market is living on borrowed time due to disrupted Strait of Hormuz flows, according to Saul Kavonic.
- Flows through the Strait of Hormuz are about one-third of pre-war levels, estimated at 5-7 million barrels per day.
- Saudi Arabia has offset half of its Red Sea port losses via increased Hormuz flows through ship-to-ship transfers.
- Strategic petroleum reserves in developed economies have been depleted.
- China's crude oil imports are gradually increasing after significant cuts in May and June.
The oil market is facing significant supply risks due to ongoing disruptions in the Strait of Hormuz, according to Saul Kavonic, Senior Research Analyst at MST Marquee. Kavonic stated that the market is currently operating on a "credit card," relying on dwindling buffers like stock draws and low demand from Asia to compensate for lost volumes.
Flows through the Strait of Hormuz are estimated to be at about one-third of pre-war levels, with only 5 to 7 million barrels per day of crude oil making it out of the Persian Gulf daily. These flows are largely supported by ship-to-ship transfers outside the strait. Saudi Arabia has managed to mitigate about half of the 5 million bpd crude shipments it lost at the Red Sea port of Yanbu by increasing flows via ship-to-ship offerings outside Oman and the UAE, Kavonic noted.
Kavonic warned that with the unresolved status of Hormuz and an unlikely diplomatic solution, the situation could worsen before it improves. He also pointed to the depletion of strategic inventories in developed economies, including the US Strategic Petroleum Reserve, which is at its lowest level since the early 1980s, as a result of record stock releases led by the International Energy Agency.
Furthermore, China's gradual ramp-up of crude oil imports after strategically slashing purchases by about 4-5 million bpd in May and June removes a significant demand-side balancing mechanism that had previously prevented oil prices from spiking.