The Oil Market Absorbed the War Shock, but Buffers Are Running Low

Global oil markets have maintained relative price stability between $90 and $100 per barrel despite the significant disruption caused by the closure of the Strait of Hormuz.

Market Dynamics and Supply Shortfalls

The closure of the Strait of Hormuz, a critical maritime chokepoint, effectively removed approximately 20 million barrels of crude oil and refined products from daily global supply, representing a fifth of global consumption.

While major Gulf producers attempted to mitigate the loss through alternative infrastructure—such as Saudi Arabia’s pipeline to the Red Sea port of Yanbu and expanded capacity at the UAE’s Fujairah terminal—these measures only partially offset the volume lost. The disruption hit refined products, specifically diesel and jet fuel, with particular severity, as the region accounts for roughly 10% of global supply for these fuels.

Factors Preventing a Price Spike

The global energy market avoided a catastrophic price surge due to three primary shock absorbers identified by analysts:

• Demand Compression: High prices incentivized a shift toward coal and renewable energy sources, particularly in Asian markets. While transportation demand remained inelastic due to government subsidies and tax rebates, the overall reduction in consumption helped bridge the supply gap.
• Production Shifts: Non-Gulf production increased by nearly 2 million barrels per day compared to 2025 levels. The United States, Russia, Guyana, and Venezuela all ramped up output to fill the void.
• Inventory Drawdowns: Markets relied heavily on existing commercial and strategic reserves. Between March and May, an estimated daily deficit of about 4.0 million barrels was largely met through the release of these stockpiles.

Economic Outlook and Policy Implications

The path to market recovery remains uncertain. Even with a potential framework agreement to reopen the Strait of Hormuz, industry projections suggest it will take two to three months to restore significant oil flows. Shipping, insurance, and operator confidence are expected to lag behind the physical reopening of the waterway.

There is a long-term risk that prolonged production halts could lead to permanent output losses, particularly in regions where capital for well maintenance is limited. As global inventories reach operational minimums, the capacity for the market to absorb further shocks has diminished.

Policymakers face three immediate challenges to prevent future volatility:

1. Inventory Management: Rebuilding strategic reserves is essential to regain a buffer against future supply disruptions.
2. Infrastructure Diversification: Relying on a single chokepoint leaves the global economy vulnerable. Expanding renewable energy and diversifying transport routes are necessary for long-term stability.
3. Targeted Support: To maintain price signals that encourage energy efficiency, government interventions—such as fuel subsidies—should be temporary and focused only on the most vulnerable consumers.

The current resilience of the global economy is a result of market flexibility and timely policy actions, but the narrowing window of spare capacity suggests that energy security will remain a primary concern for the foreseeable future.