LONDON: The world has absorbed with surprising ease the loss of over a billion barrels of oil supply since the Iran war began, but, with long-term peace elusive and buffer reserves now drained, it still faces the looming risk of future price spikes.
Tehran's throttling of the Strait of Hormuz in response to the US and Israeli attacks launched on February 28 fed fears of a catastrophic global energy crunch.
The ensuing four-month conflict did, indeed, create the biggest energy disruption in history, according to the International Energy Agency. At its worst, the headline supply loss was 14 million barrels per day.
But worries that Asia and Europe would run out of gasoline, diesel or jet fuel never materialised. And after peaking around $126 per barrel in April — still some $20 below the 2008 record — benchmark Brent oil prices are now lower than they were when the conflict began.
"This suggests traders viewed the disruption as serious but manageable, reflecting confidence in today's more resilient energy and economic systems", said John Baffes, senior economist at the World Bank.
Since the oil crisis of the 1970s, World Bank data shows that oil intensity — a measure of the role oil plays in economic activity — has fallen by more than half in most advanced economies and roughly 20% in emerging and developing countries.
Beyond that structural shift, however, three specific factors have been responsible for forestalling the worst-case scenario during the Gulf crisis.
Saudi Arabia and the UAE found alternative routes to export. Asia, led by China, curtailed buying. And countries around the world likely pulled around 1 billion barrels of oil from their reserves, including via an IEA-led record stocks release.
CHINA ADJUSTMENTS EASE GLOBAL PRESSURE
When the war broke out China had nearly 1.4 billion barrels of oil stored, according to the US Energy Information Administration. That was more than the 1.2 billion barrels held by all of the 32 members of the IEA combined, including the United States' 413 million barrels.
China's rapid electric vehicle adoption in recent years along with flexibility in oil and petrochemicals output also helped, said Ilia Bouchouev, of the Oxford Institute for Energy Studies.
"They are managing the market a lot better than (the Organisation of the Petroleum Exporting Countries) used to", said Bouchouev, a former head of derivatives trading at Koch Global Partners.
The adjustments by China, the world's biggest oil importer, helped ease global demand pressure. And the IEA's scheme to release 400 million barrels of reserves provided further breathing room at a time when US President Donald Trump was repeatedly stating an end to the war was imminent.
"Traders always took the view this can't go on much longer", said Neil Atkinson, a former IEA official.
Washington's narrative management, that more supply was coming, also made hedge funds reluctant to hold long positions that bet on prices rising, Societe Generale analysts noted.
With the signing last month of a preliminary agreement to end the war, there has been a rapid swing back towards business as usual.
"The market seems to have decided that this peace deal is for real", Atkinson said. — Reuters
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