Middle East conflict - oil market implications: a continuing assessment

Strait of Hormuz crisis: oil market disruption & what comes next

The closure of the Strait of Hormuz represents one of the most significant crude oil supply disruptions in modern history. Kpler vessel-tracking data show roughly 16 million barrels per day of petroleum products - crude, condensates, refined products, LPG, and naphtha - have stopped flowing through the world's most critical energy chokepoint. The market has not yet priced in the full consequences.

Why Hormuz cannot be replaced

The Strait connects the Persian Gulf to the Gulf of Oman and is the sole maritime passage for most Middle East oil exports. Two partial bypass routes exist, but neither offers a complete solution:

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Together, these routes move 7–8 Mbd - less than half of normal Hormuz flows. OPEC spare capacity (~4–5 Mbd total) cannot bridge the remaining gap under any realistic scenario.

Country-by-country supply analysis

Iraq - most exposed. Southern fields account for 85–90% of national output, with no pipeline route northward. Truck transport can move only ~40,000 bpd against a 4+ Mbd production base. Onshore storage hit 90% utilisation within three days of closure. Output at Rumaila and West Qurna 2 has already been cut by an estimated 1.4–1.5 Mbd. A near-total national power blackout - driven by loss of associated gas and Iranian pipeline gas - is crippling refining and energy infrastructure.

Saudi Arabia and the UAE - limited runway. Both countries are maximising bypass pipeline use, with Yanbu export volumes at record highs and the UAE redirecting through Fujairah (paused following a port attack). Approximately 30 VLCCs remain anchored in the Persian Gulf as floating storage, providing a modest additional buffer. However, both countries can sustain current production for only ~20 days before storage exhaustion and export facility constraints force output cuts.

Refinery run cuts: the underappreciated consequence

Asia faces a combined reduction in refining throughput of close to 3 Mbd. Countries with the highest exposure:

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India has instructed state-owned enterprises to consider withholding clean product exports. China has ordered refiners to cut March product exports almost entirely. If China exits product export markets, no ready substitute exists - US terminal and specification constraints prevent it from filling the gap at scale.

Product market stress

Jet fuel is the most acute pressure point. Singapore prices have climbed to ~$230/barrel (+140%). If crude had tracked jet fuel's proportional move, Brent would trade around $175. Instead it remains in the low-to-mid $80s - a gap reflecting markets still treating this as a temporary disruption rather than a structural supply shock. European and UK buyers face jet supply-at-risk exposure of close to 80% of normal import flows from the region.

LPG and naphtha face greater relative exposure as a share of global output than crude. India is showing concern around domestic LPG availability, steam cracker operators across Asia are expected to cut run rates, and summer gasoline shortages in Europe are increasingly probable as naphtha and octane blending component supply tightens.

Sanctions on Russian products

The combination of supply disruption, low European gas storage, and tightening product markets is already softening enforcement of EU sanctions on Russian-derived products. Cargoes of Jamnagar-processed diesel, potentially refined from Russian crude, have cleared in Mediterranean and Northwest European ports. If the conflict persists beyond two to three weeks, informal relaxation of enforcement appears probable. The likelihood of Russian energy re-entering European supply chains now stands at approximately 30% - up sharply from near-negligible levels prior to the conflict. India is reportedly already mulling the idea of ramping up buying of Russian crude oil.

Implications by stakeholder

• Crude traders: Physical crude delivered into China is approaching $100/barrel. Paper markets have not caught up. The divergence between flat price and physical market reality represents both a risk and an opportunity depending on positioning.
• Refinery operators: Run cut decisions should be made proactively - particularly in South Korea, India, and Thailand. Storage management and feedstock scheduling are now critical priorities.
• Product traders: Jet and diesel crack spreads are likely to remain elevated well beyond conflict resolution. Gasoline risk is building into the summer demand season.
• Policymakers: SPR releases may become necessary. IEA coordination will be essential to prevent competitive drawdowns that amplify volatility.
• Consumers: Pump prices will rise within weeks. Airfares will increase as airlines pass through jet fuel costs. LPG prices may also rise in import-dependent regions.

Conclusion

The market's muted price response reflects an assumption the disruption will be short-lived. Every additional day of closure narrows the window for an orderly resolution. No combination of bypass routes, strategic reserves, floating storage, and alternative suppliers can replace 16 Mbd of Persian Gulf export capacity on any practical timeline. When that reality reaches futures markets - as it already has in physical ones - the price adjustment will be sharp.

Beyond the immediate crisis, a diplomatic resolution alongside accelerating US production growth points toward a well-supplied market in late 2025 and into 2026. Getting there, however, will require navigating one of the most volatile supply environments in a generation.

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