A world without oil reserves to cushion the shock

Oil traders are warning that the latest escalation in tensions in the Strait of Hormuz marks a new, risky phase for the market, which is facing new disruptions without the supply glut that helped stave off a wider economic crisis during the US-Iran war, the Financial Times reports.

The United States launched a new wave of attacks on Iranian coastal defense systems and missile positions yesterday, after reimposing a naval blockade of Iranian ports, while Iran threatened to cut off even more energy exports from the region.

While both sides remain trapped in an ever-escalating conflict with no clear way out, the consequences for the global economy are inevitable as the sea passage, through which approximately a fifth of the world's oil and gas shipments passed before the war, is effectively closed again.

Reuters reported yesterday, citing informed sources, that shipping companies are avoiding the US program of passage through the Strait of Hormuz with military escort, after a wave of Iranian attacks on vessels raised security concerns.

"The fact that Iran can still target ships sailing through the Omani route means that the Trump administration's proposed solution to maintain navigation is unlikely to work," he told the British agency. Torbjorn Solvedt, principal analyst for the Middle East at risk assessment company Verisk Maplecroft.

The latest threat to Gulf crude exports comes after the International Energy Agency said on Friday that its members had already released almost three-quarters of the planned 400 million barrels of oil from emergency reserves, which were announced in March. This means that, as the FT points out, there are only a few weeks left before the additional volumes stop reaching the market.

“We have used up all the reserves we had. Everything,” one trader told the FT. “Now there is nothing left,” he added.

Oil prices fell sharply after the ceasefire was first announced, from around $100 a barrel to just over $70.

But in a sign of renewed concern among traders, Brent crude jumped above $87 on Tuesday, its highest level in more than a month. It was trading at around $84,40 yesterday, up 11 percent this week.

During the four-month closure of the strait, before last month's US-Iranian agreement to reopen it, governments in the West and Asia resorted to almost every available measure to prevent supply shortages from threatening the global economy.

Western powers have released record amounts of oil from strategic reserves onto the market, China has halved its oil imports and ordered state-owned companies to use fuel from its reserves, while the White House has even made it clear that the US could, at least theoretically, intervene in the futures market if prices get out of control.

The result was that the price of Brent crude oil peaked at $126 per barrel in April, well below its historic high, even as the International Energy Agency warned that the world was facing the biggest supply disruption in history.

But traders say that if the new closure of the strait lasts for months, with some suspecting Iran wants to keep up the pressure on US President Donald Trump ahead of November congressional elections, it is unclear this time where the oil to make up the shortfall could come from.

Amrita Sen, director of market analysis at Energy Aspects, said that before the war, the oil market had about 400 million barrels of excess inventory, not counting strategic reserves controlled by governments.

“We have almost nothing now,” she said. “The market’s confidence in the flow of oil through the Strait of Hormuz is now being seriously tested.”

Drivers are already feeling the effects at gas stations, as gasoline and diesel prices have risen faster and fallen slower than crude oil prices since the beginning of the war.

Refined fuel markets are now extremely tight, with additional disruptions affecting deliveries from Russia, the world's second-largest diesel exporter, following a series of successful Ukrainian long-range drone attacks on Russian oil refining facilities.

The International Energy Agency warned on Friday of possible shortages of gasoline and diesel, while wholesale diesel futures prices in Europe rose 14 percent this week.

Although Western powers began to shun Russian fuel in the years following Russia's invasion of Ukraine, they now have to compete for supplies with countries like Turkey and Brazil, which continued to buy Russian diesel, and now also have to look for alternative sources.

At the same time, traders are monitoring the situation in the Red Sea following the attacks by Yemeni Houthis on Saudi Arabia, carried out after the attack on Sana'a International Airport.

The Iranian-backed group has almost completely shut down shipping in the Red Sea for more than a year since late 2023. Renewed Houthi attacks would close southern access to the port of Yanbu, Saudi Arabia's only oil export route that does not pass through the Strait of Hormuz.

Tehran has hinted that it could use its Houthi allies in Yemen to close the Bab el-Mandeb Strait, which leads to the Red Sea, opening a new front against Washington and threatening two of the world's most important shipping routes.