The most pessimistic forecasts pointed to Brent reaching up to $200 per barrel, but lower Chinese demand and increased supply limited the escalation.
When the United States and Israel launched their attacks against Iran in late February, the oil market braced for one of the largest supply disruptions in decades. Nearly one-fifth of the world’s oil typically flows through the Strait of Hormuz, and a prolonged closure of that route threatened to remove millions of barrels from the market.
However, oil prices did not reach the extreme levels projected by some analysts. Brent crude futures rose to about $126 per barrel, below the all-time record of $147 recorded in 2008. Between the start of the conflict and June 11, the average stood at around $101.
In early July, the price even temporarily returned to the $70 per barrel range. This trend was surprising given the magnitude of the conflict and the strategic relevance of the Strait of Hormuz for global energy trade.
China reduced its demand for crude oil
First, China played a decisive role. The world’s largest oil importer reduced its crude purchases in June to the lowest level in nearly a decade.
The decline was due to lower domestic consumption, cuts in petrochemical activity, and restrictions on fuel exports. Likewise, the increased use of electric taxis and other forms of mobility reduced part of the demand for petroleum derivatives.
This contraction limited buying pressure in the international market. Under normal conditions, a significant disruption in the Middle East would have triggered more intense competition for available cargoes. On this occasion, the weakness of Asian demand offset part of the supply risk.
The United States increased its oil production
On the other hand, the United States increased its production to a record 13.93 million barrels per day in April. This volume bolstered the availability of crude outside the Middle East and reduced dependence on barrels transported through Hormuz.
Washington also released oil from its Strategic Reserve as part of a coordinated discharge of 400 million barrels promoted by the International Energy Agency.
The operation allowed additional crude to be placed on the market during times of peak tension. In this way, refineries had an alternative source while doubts persisted regarding shipments from the Persian Gulf.
Expectations changed rapidly
Furthermore, political signals from Washington influenced traders’ positions. Announcements regarding possible agreements, pauses in attacks, and the resumption of flows through Hormuz caused sharp movements in Brent futures.
Many funds reduced their bullish bets given the possibility of a sudden de-escalation. This caution decreased liquidity and prevented a sustained accumulation of speculative positions.
The market also showed some fatigue toward headlines related to the conflict. After several months of attacks, partial truces, and threats to maritime transport, each new announcement had a smaller effect on the price.
Saudi Arabia used an alternative route
Meanwhile, Saudi Arabia increased its exports from the port of Yanbu, located on the Red Sea. This terminal allows oil to be shipped without passing through the Strait of Hormuz.
The increase in shipments through Yanbu offset part of the barrels lost in the Gulf. Although the strait remained a critical route, Saudi infrastructure offered an alternative path to supply international buyers.
Shipments through Hormuz also resumed during some periods in June. This temporary recovery reduced fears of an immediate shortage, although transit decreased again when fighting intensified in July.
Physical supply remained abundant
Finally, traders continued to find sufficient physical oil in the market. The availability of cargoes limited the impact of disruptions and prevented the geopolitical premium from remaining at extreme levels.
Differentials for some European crudes reflected this change. North Sea Forties, one of the grades used to calculate the Brent benchmark, went from trading at a record premium in April to being offered at a discount.
This behavior indicates that the immediate market was not suffering from a shortage as severe as initial forecasts suggested. Although the conflict kept volatility high, the combination of lower demand, record production, and alternative routes sustained the supply.
The risk of another spike remains
Despite the moderation, the balance remains fragile. A more prolonged disruption of the Strait of Hormuz, a drop in US production, or an accelerated recovery in Chinese demand could drive oil prices up again.
For now, the available supply has been sufficient to contain the impact of five months of war. The market has shown that geopolitics can raise prices quickly, but also that production, reserves, and demand continue to set the limit for that rise.
Source: Reuters
Photo: Shutterstock
