The Strait of Hormuz is ‘leaking’ oil

The Strait of Hormuz is ‘leaking’ oil

The Crisis at the Strait of Hormuz

The Strait of Hormuz is leaking – For months, the global oil market has remained remarkably stable despite what many experts predicted would be a catastrophic supply disruption. The Strait of Hormuz, a vital chokepoint where over 20% of the world’s oil passes through daily, has been effectively blocked by ongoing conflict involving Iran. This has created a scenario once deemed a potential nightmare for energy markets, yet prices have not soared as feared. According to JPMorgan, visible tanker traffic through the strait has dwindled to just 15% of pre-war levels, raising questions about the resilience of the global energy system.

Clandestine Flows: A Hidden Buffer

Analysts suggest that a significant portion of oil is bypassing the blockade through covert means. These “clandestine flows” could be the key to maintaining market calm. Some experts believe tankers are evading detection by deactivating transponders, allowing them to slip through the strait unnoticed. JPMorgan estimates that over 2.1 million barrels per day of crude oil escaped the blockade during the last two weeks of May, a figure that accounts for a notable 13% of the 15.6 million barrels that normally traversed the waterway daily before the conflict.

“Despite the ongoing naval blockade and the steep decline in commercial traffic, surprising volumes of crude and petroleum products still appear to be transiting the Strait,” Natasha Kaneva, JPMorgan’s head of global commodities strategy, wrote in a client note last week. Her assessment highlights the unexpected adaptability of oil supply chains amid heightened geopolitical tensions.

Bob McNally, founder and president of Rapidan Energy Group, echoed this sentiment. “We assume Hormuz traffic has been 0% to 10% of prewar flows, but with this leakage it could be a little higher,” he said. While the clandestine flows are not sufficient to fully offset the supply shock, they have provided a temporary reprieve, reducing the immediate pressure on oil prices.

China’s Demand Shift: A Critical Factor

Jan Stuart, a global energy economist at Piper Sandler, estimates that approximately 2.9 million barrels per day of crude oil managed to pass through the Strait of Hormuz in May. This figure includes 2.1 million barrels transported on vessels that paid tolls to Iranian entities, as well as an additional 900,000 barrels of “ghost” transits—tankers that operated under the radar by using the waterway at night without activating their transponders. Stuart emphasized that these clandestine movements have played a pivotal role in mitigating the crisis, stating, “There has been far better mitigating of the crisis than I would have thought possible.”

However, the market’s relative stability cannot be attributed solely to these covert operations. A separate channel of supply, the East-West Pipeline, has been instrumental in transporting crude oil from Saudi Arabia’s oil fields to the Red Sea port of Yanbu, bypassing the strait entirely. Piper Sandler estimates that around 4.5 million barrels per day of crude oil have left the Persian Gulf through this route, offering an alternative pathway that has eased the strain on global markets.

The Impact on Oil Prices: A Mixed Picture

Brent crude futures, the international benchmark, recently fell to $93 per barrel—a level that, while higher than pre-war prices of about $70, remains significantly below the peak of $114 seen earlier this year. This price movement has sparked debate among economists about the underlying causes. Some argue that the market’s response reflects the combined effect of clandestine flows and China’s shift in energy strategy. The world’s largest consumer of oil has drastically reduced its crude imports, relying instead on massive stockpiles to buffer against supply shortfalls.

According to JPMorgan’s Kaneva, the situation is more complex than it appears. “Taken together, these adjustments help explain why prices near $100 are not signaling that the disruption is small,” she wrote. The combination of hidden supply routes and decreased demand from major buyers like China has allowed the market to absorb the shock without triggering a sharp spike in prices. Yet, this stability may be temporary, as the underlying pressures from the conflict continue to mount.

Strategic Stockpiles and the Strategic Petroleum Reserve

While the market has managed to stabilize, the long-term implications of the supply crisis are still unfolding. Commercial oil stockpiles have dropped sharply since the conflict began, and the U.S. Strategic Petroleum Reserve, a key emergency buffer, is nearing its lowest level since the 1980s. This depletion underscores the severity of the situation, as nations have been forced to draw from reserves to meet demand. “Things are going to get worse,” predicted Stuart of Piper Sandler. His forecast suggests that Brent crude could average $130 per barrel in the coming months, which would push gasoline prices above $5 per gallon this summer—compared to the current $4.20.

Stuart believes that higher oil prices will be necessary to encourage further emergency releases from strategic reserves and to prompt consumers to reduce their demand. “You’ll need to persuade people. That’s far easier to do when prices are high,” he explained. This perspective highlights the delicate balance between supply constraints and market demand, as well as the potential for prices to rise rapidly if the situation deteriorates further.

Geopolitical Tensions and Market Resilience

As the conflict in the Strait of Hormuz continues, the oil market has demonstrated unexpected resilience. While the initial fear of a supply crisis has been tempered by clandestine flows and China’s demand adjustments, the long-term effects of the war remain uncertain. The decline in commercial traffic through the strait has been a stark reminder of the region’s strategic importance, with disruptions having the potential to ripple across global economies.

Experts are divided on whether the market is overestimating or underestimating the true impact of the situation. Some, like Kaneva, argue that the crisis has been “absorbed” through a combination of factors, including unreported inventories and deeper-than-anticipated demand losses. Others, like Stuart, warn that the market may be lulled into complacency. “We’ve seen the problem, but we haven’t fully grasped its scale,” he said. This uncertainty has kept prices in a range that is both a relief and a warning, signaling that while the immediate crisis has been managed, the long-term consequences could be far more severe.

The Path Forward: What Lies Ahead?

With the Strait of Hormuz remaining a focal point of geopolitical tension, the question of how long the market can sustain its current trajectory is paramount. The clandestine flows, though significant, may not be enough to prevent a gradual increase in oil prices as the conflict persists. Meanwhile, the role of China’s demand shifts continues to be a critical variable in the equation. If the country maintains its current trajectory of reducing imports, the global market may see further stabilization, but if demand declines more sharply, the pressure on prices could intensify.

As the world watches the situation unfold, the interplay between supply constraints, demand adjustments, and strategic stockpiles will determine the next phase of the oil market. The data suggests that the market has found creative ways to navigate the crisis, but the true test will come when the flow of oil through the Strait of Hormuz is disrupted entirely. In the meantime, the oil industry and energy markets remain on high alert, with experts closely monitoring the evolving dynamics that could reshape the global energy landscape in the near future.