LONDON, May 21 – Bond.az. As prices for physical crude oil hit all-time highs of over $160 per barrel last month, analysts and traders alike rushed to predict a market Armageddon if the U.S.-Iran war dragged on and the Strait of Hormuz stayed closed.
Five weeks later, with the strait still largely shut and peace talks at an impasse, prices have not risen but have instead fallen to $100-$110 a barrel.
The fall was driven by several factors: Chinese refiners slashed refining runs and also reduced imports and instead used crude from their storage tanks. Producers, refiners and traders exported more oil and fuel from the United States to global markets to help plug the gap in supply from the Middle East.
Around 20% of global energy supplies transited the Strait of Hormuz before the war, and the conflict has removed 14 million barrels per day of oil - or 14% of global supply - from the market from suppliers such as Saudi Arabia, Iraq, the UAE and Kuwait.
"The fact that prices remain at relatively subdued levels, despite what is arguably the largest supply disruption in modern history, suggests that demand destruction is proving stronger and more widespread than expected," said Saxo Bank analyst Ole Hansen.
Middle Eastern crude grades Oman, Dubai and Murban priced at around a $9 per barrel premium to the Dubai benchmark this week, down from record high premiums of over $65 per barrel in March.
U.S. Permian-quality crude at the Magellan East Houston (MEH) terminal fell to a $1.20-a-barrel premium to U.S. crude futures on May 15, in line with pre-war levels.
U.S. crude exports to Europe are also weighing on the Atlantic basin grades. North Sea Forties crude traded at a small discount to dated Brent on May 12, versus an all-time-high $21.50 premium in April.
Prior to the start of the war on February 28, physical crude price benchmarks such as Dubai and Dated Brent were hovering around $70 per barrel.
CHINA REFINES LESS, USES STOCKPILES
The scale of the Chinese oil industry’s reaction to the crisis has been remarkable, analysts from Morgan Stanley said in a note. Chinese refiners reduced production by almost a fifth from pre-war levels to around 8.4 million bpd.
China’s net seaborne crude imports fell by 5.5 million bpd - or 5.5% of global demand - from year-ago levels to 8.5 million bpd in the 30 days to May 8, the bank said.
Chinese refiners even resold cargoes they had bought under long-term contracts to refiners in other countries - something they rarely do - amid weak domestic fuel demand and high crude prices that made resales profitable.
In the whole of Asia, home to 37% of global refining output, oil imports fell to a 10-year low in April as refiners also opted to process stocks accumulated at cheaper prices before the war.
As refiners worldwide process more oil from inventories to avoid paying higher prices in an undersupplied market, global oil inventories fell at a record pace of 246 million barrels in March and April combined, the International Energy Agency said.
"No one wants to pay for the next expensive barrel. Everyone’s waiting in hope, but at some point all these inventories are going to run out," Energy Aspects analyst George Dix said.
U.S. EXPORTS HIT RECORDS
Producers and traders have cranked up exports from the United States, the world’s biggest oil producer. The U.S. government has also sold 133 million barrels from its Strategic Petroleum Reserve.
U.S. exports of crude and fuel rose to 13 million bpd in the first two weeks of May from 11.2 million bpd in March, according to the Energy Information Administration.
Analysts warned the relatively lower prices may be unsustainable and that stocks would drop to minimum levels if Hormuz does not reopen in the next couple of months.
"The market has shown a lot of resilience, but it is running by drawing on inventories while awaiting a breakthrough on Hormuz," said Adi Imsirovic, non-resident senior associate at the Center for Strategic and International Studies, and a veteran oil trader.
