How the Iran Conflict Is Reshaping Global Oil Markets

Sometimes it's best to expect the unexpected. When the Straits of Hormuz first closed, everyone was in a panic and it was the biggest crisis that many of us have seen in this generation. There are thousands of vessels that are stuck. Ships are still getting attacked. They said they control the strait. They do not. We heard from the International Energy Agency that this is the biggest oil supply crisis ever seen. It is in the world's largest oil producing region. The.

Strait of Hormuz is responsible for 20 to 25% of the world's oil as well as gas seaborne tree. So we're talking about 20 million barrels per day. It also meant that a lot of food supplies, fertilizers, and other essential commodities were stuck. Ever since the Iranian revolution, the 70s, the idea that hormeus has been important has been known, but it's always been a back burner issue. Oil prices and shortages were expected to soar. There is worry in the market that there is no end in sight. That knock-on effect really is being felt.

People were really wondering how the world would cope with such a disruption. Many of the banks were talking $150 a barrel, $200 a barrel. But then it didn't happen. Markets barely blinked at some of the challenging headlines coming from the Middle East. The market has. Been pretty. Resilient. Although we did see prices top $126 a barrel, many of those worst fears were never materialized. We saw the market adjust to the crisis in somewhat surprising ways. Price response actually shows how resilient markets can be. So how was the biggest energy crisis in a generation so easily swallowed?

And does this ability to cope mean the world has reached peak Hormuz? As a shipping route, the Strait of Hormuz is a tight fit. The word strait comes from the Latin strictest, as in drawn tight, almost constricted, which feels especially suitable here. At its narrowest point, it's just 21 miles wide, which is barely two Manhattan's worth of width. Prior to the war, we were looking at around 120 to 130 commercial ship movements daily. 50% or so would be oil and gas vessels.

You'll. Remember a few years ago we had the ever given blockage through the Suez Canal, which also hit pretty much every commodity market. But the difference there is you can sail the long way around Africa. Hormuz is a true choke point. The president's saying the strait is completely open. Is it in fact on this Saturday morning? The information is quite fluid at present. Mixed messages. This is the theme of 2026. The stop-and-start nature of the war makes navigating the strait even more complicated. Logistical dangers and risks remain elevated.

One of the first reasons ship owners were cautious about sailing through Hormuz, even after the interim peace deal, was the presence of mines. We are talking about really big oil tankers carrying hundreds of millions of dollars worth of oil. So ship owners and owners of these cargoes were very reluctant to expose their vessels to such risk. It's one story getting ships out of Hormuz. It's another one getting them back in. Many owners will be keen to get their vessels and their crews out of harm's way, but they might think twice about making this decision to send ships back here.

How much traffic returns to the strait will affect the future of energy and therefore the global economy. And by taking a look at some of the key factors that prevented the full-blown crisis, we can find clues as to how this could play out. The first factor and perhaps the most subtly obvious is that the world was already flush with oil. Roughly 20 million barrels a day were prevented from reaching the market. Existing surplus, strategic national reserves, and commercial inventory offset nine million of that. There was a huge release of global stockpiles.

It was coordinated by the IEA and this added a lot of immediate supplies of oil, something like 400 million barrels of oil that came into the market at short notice from storage tanks all over the world. It was this one-time release that really helped us kind of like a blow off valve. The US released pretty significant volumes from its strategic reserves. Millions of barrels a day of extra oil gushing out of the US to global markets in order to dampen the price impact, particularly in the West.

US exports during this time reached a record. In Europe and in the US, we had the extra disposable income to pay up for marginal barrels where that needed to happen. And that meant that in relative terms, the West has been cushioned from the spike compared to some of the poorer nations, particularly Asian nations that were heavily reliant on Hormuz for their crude flows in the first place. Asia in particular doesn't have big oil fields. Asia has been more and more reliant on the Middle East and also on places like Russia.

The crisis highlighted that you can't have a major supply shock in the Middle East and also not have Russian oil. Another cushion was that oil coming from the Middle East never fully stopped flowing. Bypass pipelines made up for another six million barrels. Just have oil pipelines, gas pipelines going west. Saudi Arabia was able to basically pipe oil all the way across the country. This had not been tested. It worked and really was a key factor to helping avoid the worst-case scenario in terms of the oil market. Same thing with UAE.

It can currently do about one and a half million barrels per day. By the end of 2027, they're going to have that up to three million barrels per day. The piped oil lent two ports greater importance. Fujairah used by the Emirates and the Saudi port of Yanbu on the Red Sea. The upshot is in aggregate. If all the pipeline workarounds work at their maximum, you won't necessarily need as many ships to go through Hormuz in the long term. And in the even longer term,

you're potentially seeing more pipelines being built to avoid Hormuz in general. Perhaps the most unexpected force mitigating the crisis has been the actions of one country, China. The biggest reason oil prices haven't spiked in the way people though is really China. China has cut its oil imports in a way that many people though wasn't possible or certainly wouldn't have predicted at the outset of the war. We're talking four or five million barrels a day of reduced crude imports to the lowest level in about eight years. That is a massive leveler for the global oil market.

This pullback can be attributed to a pause in strategic stockpiling. This reduction in demand is really significant as a number because it is more than the consumption of what Japan, for example, would import on a given day. Some sense China did the world a favor. If they had been competing for barrels on the marketplace, quite potentially it could have seen more price impact during the closure. The measures China and other countries took to achieve roughly three million barrels in demand destruction are varied. Added up, these were the major factors preventing the crisis. But China's agility also comes from strategic investments towards

electrification. China is a leading market for electric vehicles. It's not like they had a whole bunch of electric vehicles sitting in parking lots and suddenly this crisis came on and everyone switched to EVs. They've been rapidly adopting EVs in their economy. More on this in a moment. I feel like a pawn and a big game of chess. Uncover more at bloomberg.com/videos. There's more under China's economic hood. Something like 90% of the world's solar equipment comes from China. In the first few months following the conflict, we've seen solar exports from China ramp up quite quickly.

You can see that surge here with other Asian countries, Europe and Africa leading the way. Although exports to other regions seem small, when viewing the world average, the wartime spike is significant. However, for those optimistic problems with the strait could usher in the age of renewables, realities on the ground indicate otherwise. Solar and oil don't really compete with each other because very little oil is used in the power sector. This combination of energy sources is what keeps the lights on, both literally and figuratively, and it's dominated by coal and natural gas.

The innovation of liquified natural gas is lending this resource increased importance. The LNG market is highly concentrated with the US, Qatar, Australia, and Russia making up 70% of the global supply. The US recently became the world's largest LNG exporter. Right there neck-and-neck with it is Qatar. Some of their facilities were actually damaged in the conflict. Qatar has announced plans to expand natural gas infrastructure which could lead to them regaining the title of biggest LNG supplier.

All of that will take time, but it's another indication that the straight of Hormuz will remain a critical pathway even if fees become part of the equation. Some vessels have been charged up to $2 million just to make it through.The Strait of Hormuz has to be open. Their freedom of navigation has to be respected. The key question in sort of the medium to long term is what the policing of Hormuz looks like. Will we have tolling arrangement?

There's an argument to be made that Iran's control over Hormuz might not be the same as it was, but its ability to shut Hormuz at a moment's notice will now never be forgotten. I think Iran potentially plays a more meaningful role in the oil market, assuming there is a peace agreement that allows them to boost their own production and exports. Many of these Middle Eastern producers are among the lowest cost producers in the world, which gives them a natural advantage and which makes them still very attractive and important suppliers to global refiners.

So the answer to whether the world has reached peak Hormuz is an incredibly complicated one. Markets adapted quickly, absorbing shock and fending off price extremes. But it's safe to say that most nations will be making a plan B. Even though the waterway will continue to be vital, people have learned some lessons from this crisis. The critical things of a peak Hormeus world are redundancy and resiliency and investment in alternatives.