More than three months after the Strait of Hormuz was effectively blocked, oil markets have defied the worst predictions, staying below $100 a barrel despite catastrophic supply disruptions.
Industry forecasts once warned prices could spike as high as $200, but a combination of temporary workarounds has so far absorbed much of the shock from the crisis.
The loss of more than 10 million barrels a day of Middle Eastern supply has been partially offset by record U.S. exports, a slowdown in Chinese demand, and a trickle of crude still moving through the strait.
A pre-war surplus in global inventories also helped cushion early market reactions, buying governments and traders critical time to arrange alternative supply routes.
Warren Patterson, head of commodities strategy for ING Groep NV in Singapore, said “China’s backing off from the crude market has played a crucial role in attempting to rebalance the global market, which has helped cap oil prices.”
Patterson added that “the extent of which has taken most of the market by surprise,” underscoring how few analysts anticipated Beijing’s sharp demand pullback at such a consequential moment.
Persian Gulf producers moved quickly in the early days of the conflict, with Saudi Arabia’s East-West pipeline shipping millions of barrels daily to the Red Sea and the UAE routing crude to the port of Fujairah outside the gulf.
U.S. shale production, which has boomed to record highs in recent years, turned the country into a net exporter and gave President Trump unusual geopolitical flexibility in managing the crisis response.
However, analysts are now warning that these stabilizing forces are reaching their structural limits and cannot hold markets together indefinitely.
Greg Sharenow, who helps manage nearly $24 billion as head of PIMCO’s commodity portfolio, said “each week that goes by, the system is tightening by 70 to 80 million barrels,” adding flatly that “you can’t do that forever.”
Sharenow warned that “over the course of the next few months, generously speaking, you’ll really be staring at a system that could be lacking flexibility because the buffers have been really depleted.”
U.S. oil inventories shrank to their lowest level in more than two decades last week, while emergency reserves have little remaining capacity and fuel stockpiles face critical shortfalls heading into peak summer demand months.
Sharenow was direct about domestic production constraints, saying “we’re not capable of sustaining these exports” as inventories at the Cushing, Oklahoma storage hub approach operational lows.
Domestic refiners are simultaneously running plants harder than usual to meet fuel demand, competing aggressively for barrels and pushing premiums for U.S. crude delivered in Asia sharply higher.
The Trump administration has attempted to ease pressure through strategic moves, including issuing waivers for some sanctioned Russian oil to make it easier for Indian processors to increase purchases.
Analysts at Brookings have concluded that the supply shortfall will build considerably in coming months as temporary buffers are fully depleted and market flexibility disappears.
If markets grow increasingly pessimistic about any resolution to the Hormuz impasse, analysts warn that oil prices could rise materially higher than current levels in the months ahead.
