Middle East Conflict Depletes Oil Market Buffers, Fueling Price Surge Risks

The ongoing Middle East conflict is putting a strain on the oil market, which has largely depleted its buffers. The disruption to crude oil flows through the Strait of Hormuz and attacks on Saudi shipping have reduced available supplies. In March, tanker traffic was disrupted, leading to a drawdown of crude stored on tankers at sea. Major Asian economies cut their daily crude imports by 4 to 5 million barrels in May and June, but purchasing volumes have since rebounded, eliminating that demand-management mechanism.

The market has virtually no spare capacity to absorb even a six-month disruption to crude oil flows through the Strait of Hormuz. The Saudi East-West Crude Oil Pipeline, which enables the kingdom to bypass the Strait of Hormuz and ship most of its crude to the Red Sea port of Yanbu for export, was suspended following an attack over the weekend.

Saudi Arabia can rely on local inventories at Yanbu to sustain exports for a few days, but prolonged repairs would severely hamper Red Sea crude shipments. Yemen's Houthi rebels have continued to launch attacks against Saudi shipping, with tanker attacks already reported in July. Fuel markets on all continents are signaling tightening supply conditions.

Chevron CEO Mike Wirth said the oil market's buffer stocks have been depleted and oil prices could continue to rise in the coming months. The International Energy Agency disclosed that global reported crude oil inventories fell by another 95 million barrels in August, bringing the cumulative drawdown since February to 507 million barrels.

Helima Croft stated that Saudi crude oil exports to the Red Sea had already fallen below 2 million barrels per day before the pipeline attack, driven by Houthi threats and the escalating conflict between Saudi Arabia and the Houthis. The market has partially offset the supply shortfall through route adjustments and the search for alternative sources.