World Nears Oil Operational Floor, $200/B Without Hormuz Deal

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In the US, gasoline is up by 35% to 50%. In Europe, diesel, which runs trucks, was the equivalent of $6.78 a gallon in February, and is now $8.02 per gallon (€1.82 per liter). If you are running a fleet of trucks over thousands of miles, that is a huge loss, and you might consolidate and cut out less remunerative routes.

Likewise, airlines have canceled tens of thousands of flights and ticket prices have risen, so some passengers are canceling or postponing trips. It is trucks that eliver goods to retail stores so, with diesel higher, prices of commodities have gone up and some customers have put off buying things they don't desperately need right now. If the retailer doesn't sell a product, it doesn't order more, so the trucks don't roll as often. And if the goods aren't selling, the factories scale back production, so they use less petroleum, too.

The IEA statistics suggest that the pain is greater for the poorer countries, which makes sense. The wealthy countries' consumers are paying more and cutting back a bit. Those in the developing world are just going without, as I pointed out a week ago.

The IEA expected the world to produce 106.1 million barrels a day in 2026. It won't. That projection has been revised down to 102.2 million barrels a day, a reduction of 3.9 million barrels a day. That is severe. But here is the catch. That is the reduction if“flows through the Strait gradually resume from June.” As Qasim al-Ali points out, that is an iffy bet as things now stand. So the shortfall in production will be bigger. Which will slow the world economy even more.

The agency observes,“With Hormuz tanker traffic still restricted, cumulative supply losses from Gulf producers already exceed 1 billion barrels with more than 14 mb/d of oil now shut in, an unprecedented supply shock.”

The shock hasn't been as bad as it could have been so far, for several reasons. We just saw that there is enormous demand destruction, with the economic slowdown it implies. Also, there was a glut in the oil market going into the crisis, which takes some of the pressure off. The US, Europe and China are drawing down their Strategic Petroleum Reserves at an alarming rate. That move eases the pain in the short term.

But low reserves imply a limited ability to deal with further supply shocks that may occur next year. Prime Minister Benjamin Netanyahu has signaled that he'd like to attack Iran again. So the big crisis may be next year this time, when there won't be any SPR cushion.