Uncertainty over the trajectory of the Iran war and the risk of a prolonged closure of the vital Strait of Hormuz may have rightly stoked concerns of an impending energy supply catastrophe, but the immediate situation may not be as bad as feared, according to Sparta Commodities Head of Research Neil Crosby.
"I'll say that I'm less convinced about the urgency of the situation than I was one month ago," Crosby said in an interview with.
While broadly agreeing with the narrative of a disastrous crude oil supply outlook, Crosby said several factors, including a decline in Chinese crude imports and the emergence of alternative supply routes and solutions, have introduced a degree of uncertainty to the situation.
"If the Chinese do import at close to normal levels, then you're going to see US, European, and Japanese crude stocks run low. So the math makes sense," Crosby said.
"If the Chinese draw very heavily on their crude stocks and leave crude for the rest of the world, so to speak, then the rest of Asia implicitly can run at a slightly higher rate and the oil shortage is delayed for the rest of Asia. So that's the uncertainty I have here."
China recorded a 20% year-on-year decline in its oil imports in April, marking a near four-year low, amid a continued disruption in supplies due to the effective closure of the vital Strait of Hormuz waterway, Reuters reported last week, citing customs data.
The world's largest oil importer secured 38.5 million metric tons of crude oil last month, the lowest since July 2022, the report said. The country relies on the Middle East for nearly half of its crude oil imports.
China's seaborne crude imports for April stood at 8.03 million barrels per day, which is again the lowest since July 2022, the report said, citing Kpler data.
Among Asian countries, Japan and South Korea have increased their purchases of West Texas Intermediate crude inventories from the US, which they are blending with strategic reserve barrels to maintain high refining run rates, Crosby said.
Meanwhile, oil exports from the Yanbu port in Saudi Arabia have shown a sharp rise, with Wood Mackenzie analysts estimating shipments from the facility averaging 4 million barrels per day in the first week of May, compared with about 735,000 b/d before the Iran war.
"Physical crude has gotten very oddly weak as a result of all these factors. That doesn't mean we don't have a problem, like basically what we're doing is drawing down reserves in China, the US, in Asia, but it does mean that the sort of immediate shock on the physical crude market is over for now," Crosby said.
Draws from the strategic petroleum reserves, a rise in supplies from the Yanbu facility and the UAE, Chinese import reduction, and a potential increase in output from South American countries like Brazil and Venezuela over the next six months, along with some form of inflationary demand loss could all help soften the impact of the Middle East supply crisis, Crosby said.
"It's all about time horizons as well. If you say to me that Hormuz is going to be closed for the next two years, that's a disaster. If you say it's going to be closed for three months and then reopened, we don't have a disaster. But obviously we have some macroeconomic headwinds," Crosby added.
If the Iran conflict is resolved by this summer, the floor price for crude oil will be between $80 and $90 due to demand from countries like the US and China and the International Energy Agency members to refill their strategic emergency reserves and the energy infrastructure damage in the Middle East.
"I expect SPR will be drawn down strongly as long as the Strait of Hormuz remains closed. Later, upon re-opening, there will be forward demand to refill. This I think will be done slowly and only at appropriate prices," he said.
A potential threat to the physical market is the rising risk of an unofficial ban on exports by the US due to a sharp spike in gasoline and distillates, and low inventories of diesel and jet fuel.
"Both fuels are tight. US diesel stocks are already very low. Once US exports start to price out of the market and I think that will be soon then things get tighter in Europe and Asia. Jet we saw a big swing in yields; so the supply crunch wont happen in May and maybe not June. But July might be a different story," Crosby said.
The Middle East crisis could result in a significant windfall for all the major unblocked oil producers, with Russia also likely to emerge as a beneficiary. Meanwhile, countries with weaker purchasing power and large net import needs, especially the non-OECD nations in Asia, excluding China, are likely to face the brunt of the crisis, Crosby said.