Countdown to the Next Wave of Shutdowns in the Energy Sector
On the seventh day of the conflict, the commercial traffic flow through the Strait of Hormuz has nearly ceased, with Iranian vessels dominating the activity.
JPM highlights that due to the inability to transport crude through the waterway, producers have resorted to storing oil on tankers and other facilities. Approximately 76 million barrels of crude have accumulated since the end of February, with most of it concentrated in Saudi Arabia.
Despite the disruptions in the strait, alternative export routes remain underutilized, with both Saudi Arabia and the UAE operating below their spare capacity. Saudi Arabia has been using the East-West pipeline to bypass the Hormuz and redirect barrels to the Red Sea.
The market is transitioning from pricing geopolitical risk to dealing with operational disruptions as refinery shutdowns and export constraints start to impact crude processing and regional supply flows. Iraq has already reduced supply by 1.5 million barrels per day, and Kuwait is approaching tank tops.
As export bottlenecks and refinery constraints continue to escalate, the market is anticipating the next wave of shutdowns. Disruptions could rise from 1.5 million barrels per day to potentially 6 million barrels per day if storage capacity reaches its limit.
Governments in Asia are taking measures to safeguard domestic fuel availability, with China instructing refiners to suspend exports and Japan considering strategic petroleum reserve releases.
The US administration is exploring various options to prevent an energy crisis, including waivers for fuel-blending requirements and potential participation in oil futures markets. President Trump has pledged to provide insurance guarantees and naval escorts to ensure safe passage for oil tankers in the Gulf.
While US assurances have eased some risk premium in oil markets, the full restoration of tanker flows through the strait depends on neutralizing Iran’s disruption capabilities. Until then, the oil market faces uncertainty in price outcomes, with the potential for prices to decline on reassuring headlines but rise significantly once production shutdowns in the Gulf materialize.
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