Top Oil Traders Say Billion-Barrel Shock to Echo Long After War

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(Bloomberg) — The impact of the Iran war will continue for months even after any deal to restore shipping through the Strait of Hormuz, the world’s largest oil traders have warned. Some said flows through the waterway may never return to normal. 

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Brent futures are trading just below $100, down sharply from highs of nearly $120 in the weeks immediately following the war, as the market watches for news on peace talks due to be held in Pakistan. 

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Speaking at the FT Commodities Global Summit in Lausanne, executives at some of the world’s largest oil traders warned that the rewiring of the oil market would take months even if a peace deal is agreed soon. The market is not fully reflecting the impact of the massive supply disruption, they said, cautioning that prices will need to ratchet higher to the point of pushing the global economy toward a recession if the conflict continues.

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Already, the oil market faces a guaranteed supply loss of around one billion barrels — in part because of the time it would take revive flows once the strait reopens, according to Vitol Group Chief Executive Officer Russell Hardy.  

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“You need to realign the full supply chain,” said Frederic Lasserre, head of research and analysis at Gunvor Group. “So starting with crude supply, it might take a minimum of three or four months to bring back supply to where it was before.”

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The closure of the Strait of Hormuz has unleashed a chaotic but potentially lucrative period for the companies that dominate the trade of natural resources across the globe, as they scrambled to take advantage of the huge market dislocations that the industry typically thrives on. Several also had cargoes stuck in the Persian Gulf — although Mercuria Energy Group Ltd. boss Marco Dunand said his company was able to get ships out even after the war began.

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Still, observable traffic through the strait has come to a near-standstill this week, with just a trickle of small vessels passing through.

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Executives and analysts warned that the oil market will come under growing strain if a resolution isn’t reached soon. According to Lasserre, if the war persists for another month, oil markets will hit “tank bottoms,” a term that means markets run out of stockpiles. 

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Long-Term Impacts

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Once shipping is restored through the Strait of Hormuz, the immediate effect would be to push prices lower.

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Gunvor Chief Executive Officer Gary Pedersen estimated in an interview that there are between 100 million and 150 million barrels of oil stuck in the region that could be released — “that’ll feel like an SPR release,” he said, referring to strategic government stocks. 

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But once that initial release has been absorbed, the reality of the longer-term impacts will hit home, traders and analysts said. That could push prices back up over time, particularly with a seasonal demand increase over the northern hemisphere summer. 

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Oil refineries, even if undamaged, can take weeks to ramp up their production and there’s little clarity on how quickly facilities that have been have been subject to attacks will be able to boost production. 

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At the same time, the International Energy Agency said earlier this month that top Middle Eastern oil producers can return about half of their shuttered fields to prewar levels within two weeks, but adding the final 20% of their output is likely to be challenging because of a loss in pressure.