The Truth About Crude Oil Under the Hormuz Blockade: An Iran War Won’t Alter Oversupply—A Sharp Price Drop Is Imminent

The Iran conflict has now lasted nearly one and a half months, during which international crude oil prices have fluctuated steadily around the $90 per barrel level. Although tensions have waxed and waned and the intensity of hostilities has repeatedly shifted, when viewed over this 1.5-month timeframe, short-term emotional shocks have largely been absorbed. Current oil prices are fundamentally determined by real supply-and-demand fundamentals—not by shortages. The price level near $90 per barrel is not driven by scarcity, but rather reflects a temporary equilibrium achieved through market self-adjustment; there is no substantive global crude oil shortage at this level. Many wonder: Given that the Strait of Hormuz—the world’s most critical oil chokepoint—handles nearly 20 million barrels per day (bpd), why hasn’t its disruption triggered an oil shortage? A review of recent market developments makes it clear: global supply chains are repairing themselves and filling gaps at an astonishing pace. From a supply-demand data perspective, while the theoretical shortfall caused by the Strait’s disruption is significant, rapid re-routing and increased production from multiple countries have already covered a large portion of it: Saudi Arabia’s east-west pipeline transit capacity has risen to 7 million bpd; the UAE’s pipeline transit stands at 1.8 million bpd; Iraq’s northern route contributes 600,000 bpd; and even amid the conflict, Iran continues exporting 2.1 million bpd. Together, these four sources alone offset roughly 11 million bpd of lost shipping capacity, narrowing the theoretical shortfall to about 9 million bpd. The remaining gap is being rapidly absorbed: Russia and Iran have collectively offloaded massive volumes of seaborne inventory—hundreds of millions of barrels held in floating storage—at a sustained rate of approximately 2 million bpd. Coupled with Russia’s deliberate output increases, another ~2 million bpd has been added, further reducing the gap to 7 million bpd. Meanwhile, U.S. crude exports have hit record highs; Venezuelan output has rebounded to 1.2 million bpd; and Guyana, Brazil, Nigeria, and several African nations have all ramped up production, adding at least another 1.5 million bpd in aggregate supply—shrinking the gap further to 5.5 million bpd. Demand-side contraction is also playing a key balancing role: China’s refined product imports in March dropped by 1 million bpd compared to February—a direct reflection of high prices suppressing consumption. By extrapolation, it is unsurprising that other countries collectively reduced demand by 2 million bpd under price pressure. At this point, the net global supply-demand gap has narrowed to just 200,000 bpd. Adding in strategic petroleum reserve (SPR) releases—such as Japan’s accelerated drawdown at a daily pace of 4 million bpd—the market is no longer facing scarcity; instead, it has already tipped into oversupply.

Oil Prices Face Further Downward Pressure! Beyond the Unexpected Ceasefire Expectations, Global Crude Oversupply Is Also Mounting

Global crude oil imports averaged 43 million bpd in September, up 50,000 bpd year-on-year; in October, they rose further to 44.9 million bpd—an increase of 130,000 bpd year-on-year. Inventory data point in the same direction. South Korea’s strategic petroleum reserves climbed from a June low of 50 million barrels to 67 million barrels—reaching a five-year high. Over the past three weeks, OECD member countries in Europe have collectively added approximately 11 million barrels of crude oil inventory. Overall, global inventories currently stand at about 7.999 billion barrels—up 23 million barrels from August and 12 million barrels from September. Where does this oversupply come from? Three converging forces. In its report, the firm attributes the market’s return to oversupply to three mutually reinforcing factors. First, sustained recovery in Middle Eastern supply. Since the outbreak of war, oil flows from the Middle East have experienced repeated disruptions and uneven recoveries. Yet the trend is unmistakable: regional oil exports have rebounded from a March low of 9.8 million bpd to roughly 20.7 million bpd today. Though still below the pre-war average of 24.7 million bpd, this recovery has brought substantial volumes—previously absent from the market—back online. Second, Latin American production gains filling the gap. Unlike the volatile recovery in the Middle East, Latin America’s output growth has been steady and continuous. The region now supplies roughly 1.5 million bpd more crude to global markets than a year ago—Brazil contributing ~800,000 bpd, Venezuela ~400,000 bpd, Guyana ~300,000 bpd, and Argentina ~100,000 bpd. Third, a sharp global demand contraction. This factor—often underestimated in market rebalancing—is pivotal. Since the war began, global oil consumption is estimated to have fallen by ~3.3 million bpd; the decline reached 4.1 million bpd in September and stood at 3.5 million bpd in October. Record-high prices and supply disruptions have forced consumers to slash usage significantly—absorbing large volumes of refined products, LPG, and petrochemical feedstock that would otherwise have gone unabsorbed. When these three forces are combined: Middle Eastern oil flows remain ~4 million bpd below pre-war levels, yet non-Middle Eastern output gains have offset ~1.5 million bpd; meanwhile, demand has contracted by ~3.8 million bpd—pushing the global oil market into a surplus of 1.4 million bpd in October. Crude vs. Refined Products: One Building Inventory, the Other Bleeding However, this round of oversupply is not evenly distributed. The report specifically notes that crude oil and refined products are heading in starkly divergent directions.

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Global oil markets show signs of returning to surplus as high prices dampen demand, according to analysts and banks like JP Morgan and Goldman Sachs, despite ongoing disruptions from the Iran war affecting Middle East exports.

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