Global oil markets have displayed remarkable resilience since the beginning of the Iran war, but the capacity to withstand further shocks could be severely tested in case of prolonged supply disruptions amid renewed US-Iran hostilities and the Houthi threats to South Arabian shipments, sector experts told.
In a worst-case scenario, where the US-Iran talks collapse completely, the Strait of Hormuz blockade tightens, and risks to alternative pipelines and the Red Sea routes increase, Brent crude could rise to at least $100 per barrel and touch highs of up to $140 to $150 a barrel. Oil prices of $150/bbl or higher would signal a supply disruption far greater than anything the market has faced before, they said.
"The market has shown remarkable resilience during the initial phase of the Iran war," Mamdouh G. Salameh, international oil economist and global energy expert, told. "But if the Strait of Hormuz continues to be closed for lengthy periods any market resilience will start to falter."
According to Salameh, the market's capacity to absorb additional supply disruptions is rapidly diminishing, after significant depletion of strategic and commercial oil, gas, and liquified natural gas inventories since the outbreak of the war.
"Now and with impending shortages, it will be virtually impossible to replenish its reserves. The minute severe shortages start to appear in the market will be the point when global spare production capacity will be no longer able to offset disruptions," he added.
In a note published last week, Kpler said crude markets for spot delivery were rapidly shifting from oversupply to potential physical shortages as Middle East supply disruptions, shrinking inventories, and mounting delivery risks tightened the global oil market.
The market moved from concerns about prompt oversupply to fears of supply shortages after the US-Iran memorandum of understanding collapsed and security risks returned to the Red Sea, Kpler said.
Oil flows through the Strait of Hormuz remained almost negligible last week, compared with over 8 million barrels per day in early July, the note said.
Suvro Sarkar, head of energy research at DBS, said oil markets have absorbed the initial shock of the US-Iran crisis and Hormuz closure. Prices on average remained lower than anticipated despite restricted supplies from the Gulf countries, as a ramping up of bypass pipelines, increase in output by non-Middle East producers, alternative sources for Asian buyers, and over 40% lower imports by China helped balance the markets.
Meanwhile, members of the International Energy Agency are on track to release 400 million barrels of strategic reserves and collectively still hold over a billion barrels of government-controlled stocks despite the largest coordinated release in the agency's history.
"Thus, we believe markets remain fairly resilient but that may be tested more now, given that inventory buffers are thinner, further supply bypass routes are not possible and non-OPEC output expansion is stretched. So, a couple of months of Red Sea attacks may not be catastrophic by itself but a sustained closure would be another story altogether," Sarkar said.
According to Sarkar, a combined failure of several key buffers would be required for a catastrophe to unfold. These include continued significant disruptions to flows from the Strait of Hormuz following the collapse of the US-Iran ceasefire, threats to alternative export routes including Saudi Arabia's East-West pipeline and the UAE's Fujairah line, depletion of emergency reserves, and limited room for demand cuts.
"Even outside the Iran theatre, there are attacks on Russian refiners and the Caspian Pipeline Consortium terminal on Russia's Black Sea coast disrupting exports from Kazakhstan. Given that oil markets and supply chains have shown high degree of adaptability till now, only a combined failure of multiple buffers could force a tipping point in our view," Sarkar added.
Neil Crosby, Head of Research at Sparta Commodities said the market was still some months away before it exhausted its ability to absorb further supply losses. There is still some scope for the market to maintain its resiliency, he said.
"The market in the last few months has shown that demand is quite flexible, both from an end-user perspective, and from the China imports perspective. Also there are still quite a lot of emergency reserves around."
"...the shock factor is gone, we are more into the daily routine of a very disrupted market. I think prices will be high but it will be a slow burn for now, not fireworks in prices. And lurking behind all this are lots of rail risks of course; if Trump "TACOs", we will sell off hard. If we get boots on the ground, there will be a preliminary spike of course," he added.
Price Futures Group's Phil Flynn said that while risks to the market were real and elevated, it was not yet close to tipping into a situation that was dangerous than priced.
"The so-called turning point keeps getting pushed further out than people expected. Strong non-OPEC production growth (especially US shale, Guyana, Brazil, and Canada) combined with timely strategic petroleum reserve releases has given the market real workarounds. Those two factors alone have repeatedly delayed the 'oil-price Armageddon' scenario," Flynn said.
"As long as non-OPEC barrels keep arriving and strategic stocks remain a credible backstop, the market can absorb a surprising amount of pain before it becomes catastrophic," he added.