The aftermath of the Middle East war has led to a worsening global crude oil supply shortage

The International Energy Agency predicts that, influenced by the Middle East war, the global crude oil market will enter a supply shortage situation this year due to insufficient demand support. As the navigation through the core transportation route, the Strait of Hormuz, remains obstructed for an extended period, oil-producing countries’ output has significantly declined. Based on this, it is judged that the rate of supply reduction is faster than the slowdown in demand.

In its May oil market report released on the 13th, the International Energy Agency set this year’s global crude oil demand at 104 million barrels per day. This figure is 1.3 million barrels per day lower than the forecast before the full-scale outbreak of war following the U.S. and Israel airstrikes on Iran in February of this year. This indicates that economic uncertainty combined with energy price shocks has led to a contraction in end-user consumption. In fact, the IEA expects oil demand in the second quarter of this year to decrease by 2.4 million barrels per day compared to the same period last year, and on an annual basis, a daily reduction of 420k barrels is also projected.

The problem is that even if demand declines, the reduction in supply is even greater. The IEA believes that even assuming the gradual resumption of oil tanker navigation through the Strait of Hormuz starting in June, global crude oil supply this year will only reach 102.2 million barrels per day. Compared to demand, this results in a daily shortfall of 1.8 million barrels. Before the war, in January and February of this year, global oil supply was around 107 million barrels per day, but by April it had fallen to 95.1 million barrels per day. The cumulative reduction since February has reached 12.8 million barrels per day.

The core of the supply shock lies in the Gulf region. The IEA points out that, affected by the blockade of the Strait of Hormuz, Gulf oil-producing countries have reduced their output by 14.4 million barrels per day compared to pre-war levels. The increase in production and exports along the Atlantic coast has partially filled the gap, but it is insufficient to offset the entire shortage. The cumulative supply loss has exceeded 1 billion barrels, and it is currently estimated that over 14 million barrels per day of production remain interrupted. As a result, inventories are also declining rapidly. Global crude oil inventories decreased by 129 million barrels in March and by 117 million barrels in April. Notably, member countries of the IEA released strategic reserves for emergency response, causing on-land inventories in OECD countries to plummet by 146 million barrels.

However, the IEA assesses that, since the market was already in a state of oversupply before the war and producing and consuming countries are responding based on price and logistics signals, the current supply-demand gap has already narrowed compared to initial expectations. Additionally, if a ceasefire agreement is reached, and oil transportation through the Strait of Hormuz gradually returns to normal from the third quarter, demand may rebound again by the end of the year. Nevertheless, the speed of supply recovery will be slower than the demand rebound, so at least until the last quarter of this year, international oil prices and energy supply-demand tensions are likely to remain the market’s core variables.