Saved by the barrel: Why crude hasn't hit the $200 mark

When the Strait of Hormuz tightened, many braced for $200-a-barrel oil. More than three months on, that nightmare scenario is still nowhere in the picture.The disruption, which removed more than 10 million barrels a day of Middle Eastern supply from the market, had fuelled warnings of crude prices soaring to as much as $200 a barrel.

Instead, oil has remained below the $100 mark, supported by a combination of stronger US exports, weaker Chinese demand and alternative supply arrangements.“People thought it was going to be a lot worse,” President Donald Trump said Friday. “Today I looked at $96 a barrel, people thought that was going to be $300 a barrel.” After US and Israel launched joint strikes on Iran, the country tightened its noose on the crucial Strait of Hormuz.

The chockhold disrupted oil supplies across the world as the passage carried 20% of global energy supplies. Consequently, crude prices soared beyond the $125 per barrel mark from the $70 levels earlier. Now, fuel prices are swinging near the $100 per barrel range, far below analyst's predictions.Here's what has kept crude prices from hitting the $200 mark yet:

Going Hormuz and beyond

Oil-producing nations in the Persian Gulf have sought alternative routes to maintain exports.

Saudi Arabia has redirected crude through its East-West pipeline to the Red Sea, while the United Arab Emirates has used pipelines leading to Fujairah outside the Gulf.Some vessels have continued using the Strait of Hormuz despite the risks. According to shipping data, daily transits have dropped to two or three ships from almost 100 before the conflict. However, an official familiar with US Central Command operations cited by Bloomberg reported a much higher figure, saying nearly 1,000 commercial vessels had crossed the waterway over the past two months.“As a bare minimum of what counts as a ‘meaningful recovery’ I think that we would need to see a full week averaging 20 ships per day — and that’s not realistic until there is a durable US-Iran settlement, which keeps getting pushed out,” said Pavel Molchanov, an analyst at Raymond James.

Restraining and rerouting oil flows

At the same time, China, world's largest oil importer, reduced inbound shipments by nearly 40% in May compared with last year's average, according to Vortexa Ltd.

The decline has helped offset a significant portion of the barrels lost due to the conflict.Analysts attribute the slowdown partly to the country's decision to halt expansion of its strategic reserves. Increased use of coal in chemical production and growing electric vehicle adoption have also weighed on oil consumption.Estimates from Kpler and Energy Aspects Ltd. place Chinese refinery throughput in May and June at around 13 million barrels a day, compared with an average of 14.8 million barrels a day last year.“China’s backing off from the crude market has played a crucial role in attempting to rebalance the global market, which has helped cap oil prices,” Warren Patterson, the head of commodities strategy for ING Groep NV in Singapore told Bloomberg. “The extent of which has taken most of the market by surprise.”Meanwhile, the United States also stepped up exports. American shipments of crude and fuel in May were more than 2 million barrels a day higher than the average recorded throughout last year.“Over three months into this conflict, the world has proven surprisingly resilient,” Maria Angelicoussis, chief executive officer of Angelicoussis Group, said in remarks this week. “Commodity prices are up by 50% or 60%, Asian LNG prices by 90%, but they’re not at the sky-high levels that at least I would have personally expected.”The US has relied heavily on its position as a major energy exporter to support markets, pledging to release 172 million barrels from the Strategic Petroleum Reserve.

Nearly half of the released barrels have been shipped overseas, including to Europe.Market sentiment has also been shaped by expectations that a diplomatic resolution remains possible. Traders have become cautious about maintaining large bullish positions, with open interest in Brent crude futures falling to its lowest level since August.Meanwhile, the Middle East chaos that began back on February 28 has continued to strain oil markets, for almost 100 days now.