Reserves that prevented 'full-blown' oil shock running low, IMF says

The global oil market faced one of its most severe disruptions in decades due to the ongoing conflict in the Middle East, yet prices have stabilized at around $90 to $100 per barrel, far below initial expectations of a sharp spike. This unexpected moderation has raised questions among analysts and industry experts about the resilience of current supply chains and the extent to which the market's ability to absorb shocks is being tested. The closure of the Strait of Hormuz, a vital artery for global oil trade, cut off approximately 20 million barrels of crude oil and refined products daily, representing roughly a fifth of global consumption. Despite this, the market has managed to avoid a more dramatic price surge, thanks to a combination of mitigating factors. The immediate effects of the closure were profound. With the Strait of Hormuz effectively shut down, Gulf producers scrambled to reroute their exports. Saudi Arabia diverted oil through its pipeline network to the Red Sea port of Yanbu, while the United Arab Emirates pushed its Fujairah port near its limits. However, these efforts only partially compensated for the loss of Hormuz capacity. Beyond crude oil, the regional disruption severely impacted refined product outputs, particularly diesel and jet fuel, sectors in which the Gulf accounts for about 10% of global supply. By late May, over 1.1 billion barrels of crude oil, approximately 10 days of normal global consumption, remained stranded, surpassing the deficits observed during past major oil crises such as the 1973 oil shock, the Iran-Iraq war, and the Gulf War. Several key factors contributed to the market's ability to absorb this massive disruption. Prior to the conflict, global supply exceeded demand by about 2 million barrels per day, offering a buffer against sudden shortages. From March to May, three main elements helped bridge the gap created by the crisis. First, demand in Asia declined significantly as rising oil prices prompted consumers to seek alternatives like coal and renewable energy sources. However, transportation demand remained relatively resilient, partly due to government-imposed fuel price caps, subsidies, and tax rebates aimed at limiting economic fallout. These measures came at a considerable fiscal cost to governments. Second, non-Gulf production increased unexpectedly, with output rising nearly 2 million barrels per day above 2025 levels. The United States played a leading role in this increase, supported by contributions from Venezuela, Guyana, and Russia. Finally, global oil inventories absorbed much of the shortfall. An estimated deficit of 4.0 million barrels per day during March to May was largely offset by the drawdown of both commercial and strategic reserves, particularly in China and other regions holding substantial stockpiles. Despite these temporary solutions, the path to recovery appears slow and uncertain. Before the latest escalation of hostilities, an agreement between the U.S. and Iran aimed at reopening the Strait of Hormuz led to a drop in oil prices as stranded shipments began to flow back into the market. However, the restoration of free navigation through the strait remains unclear, along with the pace at which shipping, insurance, and operational confidence might rebound. Industry estimates suggest that even with a full reopening, it could take two to three months before a significant portion of oil traffic resumes. Prolonged closures could lead to permanent output losses, especially in areas where financial resources to restart drilling operations are limited. As supply begins to stabilize, the closure of the oil deficit will occur gradually, depleting inventory levels toward operational minimums, the point at which the physical infrastructure of the oil market starts to constrain further adjustments. Policymakers face growing concerns about the diminishing flexibility of energy markets. The cushions that allowed the current crisis to be absorbed are now smaller, having been depleted by the deployment of spare capacity, reduced demand, and the drawdown of stored oil. Without replenishing these reserves, the world may find itself in a more vulnerable position should another disruption arise.