Oil prices moved lower early Tuesday as the International Energy Agency said it expects oil demand to fall this year on a lack of supply as the Strait of Hormuz remains essentially closed with the United States blockading Iranian ports while Iran continues to prevent most tanker transit though the waterway.
West Texas Intermediate crude oil for May delivery was last seen down US$1.74 to US$97.34 per barrel, while June Brent oil was down US$0.38 to US$98.98.
Persian Gulf nations shipped a fifth of daily oil supply through the Strait prior to the start of the war. While some of the region's producers have increased pipeline shipments outside of the conflict, the bulk of the supply remains off the market. The United States and Iran resumed hostilities following unsuccessful weekend talks to end the conflict. Though there are no reports the two countries are carrying out strikes, the U.S. Navy is preventing traffic to and from Iranian ports and few ships are passing through the Strait for fear of Iranian attacks.
"The SoH (Strait of Hormuz) is now essentially fully closed. Iran won't allow non-Iranian oil out while the US blockade will prevent Iranian oil to transit out through the SoH. The only oil coming from the Middle East is now coming from Saudi Arabia through the East-West pipeline to Yanbu in the Read Sea," Bjarne Schieldrop, chief commodities strategist at SEB Research wrote.
The supply shock is forcing spot oil prices well above futures as countries compete for scant supply. The Wall Street Journal reported Dated Brent oil, for delivery within 30 days, traded at US$132.74 on Monday as desperate buyers meet a lack of suppliers.
In its monthly Oil Market Report, the International Energy Agency said the lack of supply is being met with a drop in demand. The agency said it expects oil demand to fall by 80,000 barrels per day this year, the first drop since the pandemic, and down by 730,000 bpd from its prior forecast.
"Initially, the deepest cuts in oil use have come in the Middle East and Asia Pacific, mainly for naphtha, LPG and jet fuel. However, demand destruction will spread as scarcity and higher prices persist," it said.
The agency said supply dropped by 10.1-million bpd to 97 million in March due to the closure of the Strait and Iranian attacks on oil infrastructure in the Persian Gulf region. Global oil inventories dropped by 85-million barrels last month, with stocks outside the Middle East down by 205-million barrels.
"Resuming flows through the Strait of Hormuz remains the single most important variable in easing the pressure on energy supplies, prices and the global economy ... Shipments through the Strait remained severely restricted, with loadings of crude, natural gas liquids and refined products averaging around 3.8 mb/d, compared with more than 20 mb/d in February ahead of the crisis," the report noted.