Iran War Oil Supply Loss Absorbed, But Depleted Stocks Pose Risk of Future Price Spikes

The Iran war has led to the biggest energy disruption in history, resulting in over a billion barrels of oil supply loss. According to the International Energy Agency, at its worst, the headline supply loss was 14 million barrels per day.

Despite initial fears of a catastrophic global energy crunch, worries that Asia and Europe would run out of gasoline, diesel or jet fuel never materialized. The ensuing four-month conflict saw benchmark Brent oil prices peak around $126 per barrel in April, but they are now lower than when the conflict began.

The market absorbed the supply loss with surprising ease due to several factors. Saudi Arabia and the UAE found alternative routes to export, Asia curtailed buying, led by China's adjustments, and countries pulled around 1 billion barrels of oil from their reserves through an IEA-led record stocks release.

While prices may reflect expectations of a rapid return to pre-war supply levels, data on tanker traffic through the Strait of Hormuz tells a different story. The global economy weathered the shock by drawing down stocks at a record pace, draining the buffers designed to protect it from supply crises.