Global oil supply is “rapidly shrinking” as the war in Iran and the closure of the Strait of Hormuz drag into the third month, a report by the International Energy Agency says.
In April, global oil supply shrank by 1.8 million barrels a day, with the total losses since February amounting to 12.8 million barrels of oil lost every day, the IEA’s oil market report for May said.
The loss of supply from the closure of the Strait of Hormuz is “depleting global oil inventories at a record pace,” the report warned.
The uncertainty and “conflicting signals” over whether or not the United States and Iran will agree to a peace deal led to “wild swings” in benchmark oil prices in April, the report added.
“With Hormuz tanker traffic still restricted, cumulative supply losses from Gulf producers already exceed 1 billion barrels,” it said.
However, this has coincided with other producers, like Canada, the United States, Brazil, Kazakhstan, Venezuela and Russia, increasing crude oil exports, it added.
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The continued uncertainty has also hit oil demand, with Chinese, Japanese, Korean and Indian oil imports reducing sharply and “end users” also reducing their consumption of oil, the report says.
Higher jet fuel costs have also meant that people are flying a whole lot less, with aviation activity running “below normal level.”
If a deal between Iran and the United States were to be reached today, allowing the Strait of Hormuz to be opened for oil tanker traffic, the report predicts oil demand would swing back to growth by the third quarter — July, August and September — of this year.
However, the supply of oil “will likely be slower to recover.”
This will mean more price volatility, particularly ahead of the summer, when demand for energy is highest across the world.
The price of Brent crude, the global benchmark for the price of oil, was well above pre-war levels on Wednesday, around US$107 per barrel.
A report published in March warned that if the Iran war drags on till June, oil prices could breach US$200 a barrel. That would translate to a price of $US7 per gallon for consumers at the pump.
“If the Strait were to stay closed for an extended period, prices would need to move high enough to destroy an historically large amount of global oil demand,” the report added.
If war continues for three more months, “that would see talk quickly turn to global recession, as the world experiences a substantial market risk off.”
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