Hormuz disruption cuts oil flows 75%, demand shock may persist

The Strait of Hormuz blockade has cut oil flows to a quarter of pre-war levels, yet the consensus that prices revert once it reopens may misread the demand shock, with Brent at $87.24.

"The crude market is pricing a swift normalization that may not materialize," said Daniel Hynes, senior commodity strategist at ANZ. "The demand destruction from six months of disrupted shipping lanes and damaged refining capacity runs deeper than a simple supply-demand rebalancing."

Brent crude futures fell 0.7 percent to $87.24 a barrel by 0004 GMT Thursday, down for a fourth day, while West Texas Intermediate crude slipped 0.7 percent to $81.67, extending a five-day losing streak. The declines came as Iran and Oman work to finalize an agreement to control the strait, which carried oil and natural gas shipments equal to about one-fifth of global consumption before the U.S.-Israeli war on Iran began Feb. 28. Ship-tracking data from Kpler shows just five vessels transited the strait Tuesday, down from seven Monday and nine Sunday, against a pre-war daily average of 130.

The stakes extend beyond crude. U.S. distillate stockpiles, including diesel and heating oil, fell 2.2 million barrels to 103.4 million barrels in the week to Aug. 21 — the lowest level ever recorded for this time of year, according to EIA data. With Middle East refineries damaged and Ukraine striking Russian refining capacity, the diesel supply crunch could keep energy prices elevated even if the strait reopens, feeding into inflation that the Bureau of Economic Analysis reported stuck at 3.7 percent on the PCE index in July.

The demand-side argument rests on a structural shift in consumption patterns that predates the war but has accelerated since. China has bought roughly 400 million fewer barrels of oil since the conflict began compared with the same period last year, reflecting a ban on fuel exports, lower refining output and the growing use of electric transport. That decline has helped place a ceiling on prices this year, even as the worst supply disruption in decades removed barrels from the market.

"China has become the swing demand centre," said June Goh, an analyst at Sparta Commodities. The country's buying spree last year may have accounted for as much as half of global oil demand growth; its current pullback is doing the opposite — balancing a market that OPEC+ can no longer control.

OPEC+ Loses Its Leverage

OPEC+ accounted for about 40 percent of global oil output in July, down from more than 48 percent before the war, according to Reuters calculations based on International Energy Agency data. The core group of seven producers, including Saudi Arabia and Russia, now accounts for only a quarter of world output. Since March, the alliance has announced six output increases, but most have remained on paper because the Hormuz blockade prevents exports from reaching market. The contrast with 2019, when OPEC+ decisions were closely watched by traders, is stark: the key question then was how much oil the group chose to pump; now it is how much can physically be exported.

The last time a comparable supply shock hit global markets was the 1990-91 Gulf War, when Kuwait's output was knocked offline. That disruption was resolved in months. This one has persisted for six months, and the structural damage to refining capacity in the Middle East and Russia suggests the recovery will be slower.

Inflation and Rates Feel the Pinch

The whipsawing energy prices have kept inflation elevated. The Personal Consumption Expenditures index was unchanged from June at 3.7 percent in July, with core PCE at 3.3 percent — both above the Federal Reserve's 2 percent target. The 10-year U.S. Treasury yield has retreated to about 4.6 percent from nearly 4.75 percent, and the 30-year yield to about 5.18 percent from above 5.3 percent, as falling oil prices eased some inflation pressure. But the national average gas price ticked up to $4.10 a gallon Wednesday, AAA data shows, and mortgage rates at 6.74 percent for a 30-year fixed loan remain a drag on housing.

If the strait reopens and flows normalize, the question becomes whether demand returns to its pre-war trajectory. The evidence from China's import cuts and the structural shift toward electric transport suggests it may not. That would leave oil markets with a new equilibrium — one where OPEC+ has less influence, China sets the demand tone, and prices stay elevated even after the blockade lifts.

This article is for informational purposes only and does not constitute investment advice.