Oil supply disruption alert continues to escalate; the eight major oil-producing countries' "symbolic" increase in production proves ineffective

Ask AI · How can the Strait of Hormuz closure make the production increase plan effectively meaningless?

On April 5, eight OPEC+ oil-producing countries (including Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman) held a virtual meeting and decided to implement a production adjustment of 206k barrels per day, effective in May, from the additional voluntary production cuts of 1.65 million barrels per day announced in April 2023. This is the second time since the outbreak of the Middle East conflict that the aforementioned oil-producing countries have decided on a modest production increase.

But in the face of the reality of the largest ever oil supply disruption in history, with a daily shortfall as high as 11 million barrels, and the Strait of Hormuz remaining persistently disrupted, the above-mentioned increase is negligible.

This symbolic production increase can only remain on paper, because the major oil-producing countries in the Middle East have already lost the ability to add supply to the market due to the Iran-U.S. war. Since late February, the closure of the Strait of Hormuz has greatly reduced oil exports from Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq; meanwhile, the war has caused severe damage to many key oil and gas production facilities in the Gulf region. Alternative routes around the Strait of Hormuz are operating at full capacity and hauling volumes are far from sufficient. Even if Middle East production facilities resume operations and even if small incremental production is added, it still cannot be shipped out. OPEC+ other members such as Russia also cannot raise output due to Western sanctions and infrastructure damage during the conflict between Russia and Ukraine.

Multiple Gulf officials said that even if the war ends and the Strait of Hormuz is immediately reopened, it would still take several months to restore normal operations and reach production targets. OPEC+ sources acknowledged that the production increase has limited impact on supply in the short term, but it will send a signal that production can be raised once the Strait of Hormuz is restored to passage.

In a joint statement, the eight oil-producing countries expressed concern about attacks on energy infrastructure, noting that restoring damaged energy assets to full operations requires both huge costs and a long time, thereby affecting overall supply. They emphasized that any actions that undermine energy supply security—whether attacks on infrastructure or disruptions to international sea lanes—will intensify market volatility.

Recently, many investment professionals have reminded that the market has “irrational optimism,” which greatly underestimates the risk of a long-term closure of the Strait of Hormuz. At present, the spot and futures markets are already extremely fragmented. On April 2, during intraday trading, the spot Brent crude price briefly surged to $141.37 per barrel, the highest level since the 2008 financial crisis. The spread between spot and futures widened to about $34. Although the benchmark Brent futures price is still below the level when the Russia-Ukraine conflict broke out, spot Brent reflects a more short-term, more immediately delivered crude price.

This means that while the futures market is still being swayed by the “verbal interventions” from both the U.S. and Iran and bets on a ceasefire, the spot market is already pricing scarcity. Oil market alarms—deafening.

According to the Financial Times, IEA Executive Director Fatih Birol warned that if the Strait of Hormuz is not reopened for shipping, the amount of crude oil and refined products lost in April would be twice that lost in March. Even if the conflict ends, it would still take a long time to restore normality. “We’re tracking every key energy asset in the region hour by hour every day,” he said—referring to oil and gas fields, pipelines, refineries, and LNG terminals. “There are currently 72 energy assets that have been damaged, and one-third of them are severely or very severely damaged.”

As the buffer measures are rapidly used up, Morgan Stanley said in a report dated March 30 that the severity of the Middle East crude oil supply shock is several times greater than the Russia supply loss in 2022, and the most troublesome issue is not crude oil, but refined products—namely, the jet fuel, diesel, and naphtha markets are entering a phase of substantial supply shortages.

An analyst at ICIS, a global commodity market information service provider, told The Paper that regardless of how the U.S.-Iran conflict evolves over the next few weeks, the supply shock has been triggered irreversibly. Its impact on energy, chemicals, and the global economy will appear in stages over the course of the year, but it has still not been properly priced by the market. “The current market (stock index, crude oil futures) is highly dependent on political statements and negotiation rumors. Crude oil prices have repeatedly shown large day-ahead swings of ±$15 per barrel, but these reactions seriously underestimate real-world supply disruptions, cost increases, and demand destruction. The market is ‘listening to speeches,’ but the supply chain is ‘bleeding for real.’”