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Like pummelled dough, the world regains its shape after major disruptions, but with subtle indentations. The Covid pandemic did not permanently kill off gyms and handshakes, but remote work habits and higher national debts endure. Now, with the Strait of Hormuz about to reopen, we will see what fingerprints the Iran war has left on the world’s energy markets.
President Trump says “oil will flow” from Friday. In reality it may take months for things to get back to full speed given the fragility of the US-Iran accord, snarled-up logistics and damaged infrastructure. But it is a fair bet that, once flows resume properly, there will actually be a lot of extra oil in the system.
There’s the United Arab Emirates, for example, which took advantage of the crisis to leave the Organisation of the Petroleum Exporting Countries and has more than 1mn barrels a day of production it can turn on virtually at the touch of a button. Then there’s Iran itself, which, if freed from sanctions, could rapidly add another half a million barrels or so. And both the UAE and Iran have some of the best resource bases in the world, meaning there is a lot more to come with time and investment.
The quick production boost would come on top of an already oversupplied world: a veritable flood of new projects, largely in Brazil, the US and Guyana, will add 2.8mn b/d in 2027, according to Wood Mackenzie analysis, bringing total oil production somewhere in the region of 108mn-109mn b/d.
On the flipside, the energy crisis has cast a shadow over oil demand. While the 3mn b/d lost in April are mostly the temporary result of physical deliveries to Asian countries falling short, there are two longer-lasting trends. The first is that relatively expensive oil products, and heightened supply insecurity, will have nudged the energy transition forward. In Europe, for instance, sales of electric vehicles have picked up speed.
The second dampener is China, which cut its imports by about 4mn b/d during the course of the crisis, giving the world an invaluable helping hand in stabilising global oil prices. While Beijing probably replaced a good chunk of this with oil from inventories or by using stored products rather than making more, underlying consumption in China has almost certainly weakened. Chinese retail sales shrank in May, year on year, for the first time since a severe Covid wave in 2022.
That sets the scene for oil glut by next year, with extra production of perhaps 3mn-4mn b/d — and oil producers no doubt eyeing prices with unease.
Still, in the same way that oil prices didn’t rocket during the crisis, a rebound in supply may not make them crater. The closure of the strait has in total knocked more than 1bn barrels of oil off global supply, most coming out of strategic and commercial reserves. Governments the world over may well see fit to build up this buffer again. If one thing has changed, it ought to be an increased appreciation for the virtue of being prepared.
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