Why geopolitical spikes barely budge oil prices?

Oil prices are under focus for a while now. Brent crude prices initially surged by $8 per barrel, following Israel’s strikes on Iran last week, but this increase quickly settled around $5 per barrel.

There are risks of Israel further targeting Iranian oil facilities, which could affect around 3 million barrels per day of oil production. 

Additionally, the Strait of Hormuz trade route could be closed, and there could be some kind of indirect retaliation with Iranian strikes on Saudi Arabia’s oil infrastructure. 

Given the market fundamentals and risks to supply, the $5-per-barrel increase in Brent prices does not sound much, according to David Wech, chief economist at Vortexa. 

“There is a long history of incidents over recent decades where outages actually happened or were anticipated, but days or weeks later, everything was more or less back to normal. This sticks in many minds,” Wech said in a report on Friday. 

Massive oil storage

Wech added:

On the other hand, the market is more and more aware of the massive amount of oil in storage and the wider supply chain.

Vortexa tracks approximately 3.3 billion barrels of crude oil in onshore storage tanks and typically another 1.2 billion barrels at sea. 

This totals 4.5 billion barrels of tracked oil, which can be easily expanded to 5.5 billion barrels if underground strategic storage, untracked sites, and oil in pipelines are added to the mix, the shiptracking agency said. 

This compares to an estimated 84 million barrels per day of crude demand.

In a completely theoretical scenario, if global production stopped entirely, available oil would sufficiently cover demand for 65 days. Product stocks and other supply chain volumes would likely extend this to nearly 100 days of global demand coverage, the agency said.

“Now this is not the relevant calculation, but it is still giving a first indication of the power of oil in the supply chain,” Wech said. 

Oil Prices outlook: Different scenarios

In a realistic scenario, if the average 13.5 million barrels per day of crude oil exported from the Middle East Gulf via the Strait of Hormuz over the past 12 months are completely lost, oil in the supply chain would then be able to cover global demand for roughly 13 months, according to Vortexa’s analysis. 

“The 4.6mbd of product exports through the Strait of Hormuz could probably be covered for more than 2 years,” Wech added. 

With a more realistic assumption, such as a persistent loss of 1 million barrels of crude, the storage coverage would extend beyond 15 years, according to Wech.

Naturally, oil reserves would not be fully depleted, Wech argues. 

Furthermore, various adaptive strategies would be implemented to address any difficulties. These could include establishing new supply chains, sourcing alternative supplies (such as US shale oil or other energy types), and implementing demand reductions.

“The point is, we do not really need to be afraid to run out of oil – there are much more relevant concerns in global geopolitics than this one,” Wech said. 

Accordingly, the reaction of oil prices to the latest escalation in the Middle East has been relatively lukewarm.

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