When the Worst Crisis Doesn't Spike Prices

The International Energy Agency has characterized the Iran war and the closure of the Strait of Hormuz as the "largest supply disruption in the history of the global oil market." Yet Brent crude traded at $75.20/bbl on Tuesday, up +0.51%—elevated, but nowhere near the $200-per-barrel doomsday scenarios that dominated analyst calls in March. Shipping traffic through the Strait of Hormuz has been largely blocked by Iran since February 28, 2026, when the United States and Israel launched an air war against Iran.

Until the war, about 25% of the world's seaborne oil trade and 20% of the world's liquefied natural gas passed through the strait.

The puzzle isn't why prices rose. It's why they haven't exploded. Global oil supply crashed by 10.1 million barrels per day in March due to attacks on energy infrastructure and restrictions on tanker traffic in the Middle East, with global oil output expected to fall by 6.9 million barrels per day year-on-year in the second quarter of 2026—its largest quarterly decline since the COVID-19 pandemic. That's roughly equivalent to losing all of Saudi Arabia's exports overnight. The answer lies in an unlikely place: China's warehouses.

How Long Can Beijing's Stockpile Last?

China's stockpiles are estimated at around 1.4 billion barrels, while the country's crude imports plunged 20% in April to 9.4 million barrels per day—the biggest drop since the pandemic—with data for May suggesting a steeper dive to 7 million barrels per day.

China entered 2026 with a sizable buffer after stockpiling heavily through 2025, when it was estimated to have added roughly 1 million barrels per day to storage while prices hovered near $60. That foresight now looks prescient. China has not been a consistent buyer during the disruption—it has been a source of supply, offsetting part of the loss from the Middle East by releasing stored crude into the system.

But the math is unforgiving. Even if drawdown rates quicken to two million barrels per day, the more than 200 million barrels built up since early 2025 are enough to last through mid-September.

That cushion is nearing an end—once inventories are drawn down to operational levels, China will need to return to the market to maintain refinery runs. When the world's largest crude importer stops selling and starts buying again, the fragile supply-demand balance that has kept prices from spiking could collapse in weeks.

Hamad Hussain, climate and commodities economist at Capital Economics, noted that "weakness in China's crude imports could delay the crunch point for the global oil market," though he previously estimated that Brent crude prices would hit record highs by the end of June, assuming market conditions and drawdown trends persisted.

Can Demand Destruction Hold the Line?

The other force capping prices is grimmer: people are simply using less oil because they can't afford it. The International Energy Agency has delivered a stark warning that global oil demand is now on track to contract sharply in 2026 amid the ongoing Strait of Hormuz supply shock, with what began as a geopolitical disruption morphing into a full-blown demand destruction event.

Oil demand is projected to contract by 80,000 barrels per day in 2026, with the sharpest demand cuts coming from the Middle East and Asia Pacific, according to the IEA.

The U.S. Energy Information Administration now assumes that global oil demand will increase by an average of 0.2 million barrels per day in 2026, down from an average of 0.6 million barrels per day in last month's Short-Term Energy Outlook and 1.2 million barrels per day in the February outlook.

March and April already saw demand drops of 800,000 barrels per day and 2.3 million barrels per day, respectively, hitting naphtha, LPG, and jet fuel hardest in the Middle East and Asia-Pacific.

The Financial Times reported that the oil industry faces a "gruesome" demand shock from the Iran crisis, with prospects for a rapid and full reopening of the Strait of Hormuz looking bleak. March saw 1.75 million electric vehicles sold globally, up 66% from February and 3% year over year, correlating with rising gas prices, according to Benchmark Mineral Intelligence data. If high prices are accelerating the shift to EVs, some of this demand destruction may prove permanent.

Are Gulf States Building Their Way Out?

The UAE isn't waiting for the strait to reopen. A new pipeline that will bypass the Strait of Hormuz is about 50% complete, with efforts being accelerated to begin flowing crude next year, according to ADNOC CEO Sultan Al Jaber, who said the pipeline will terminate at Fujairah on the Gulf of Oman.

Together with an existing 250-mile pipeline to Fujairah that has a capacity of 1.8 million barrels per day, the new midstream infrastructure would double the volume of crude that the UAE can route outside the Strait of Hormuz.

But infrastructure takes time. It will take at least four months to ramp oil flows up to 80% of normal levels even if the conflict ends immediately, Al Jaber said, with full normalization not expected until the first or second quarter of 2027.

More than 1 billion barrels of oil have been lost due to the strait's closure, the CEO said, with nearly 100 million additional barrels lost every week that Hormuz remains closed. That's roughly $7 billion per week in lost oil revenue at current prices—enough to fund the entire annual budget of a mid-sized European nation.

India, meanwhile, is hedging its bets through diplomacy. The India-Oman Comprehensive Economic Partnership Agreement officially came into effect on June 1, opening up immediate duty-free market access for Indian exporters across more than 98% of Oman's tariff lines.

The agreement aligns with India's long-term connectivity and energy diversification plans, particularly the proposed Middle East-India Deepwater Pipeline linking Oman to Gujarat—a 2,000-kilometer subsea pipeline estimated to cost around $4.7-4.8 billion, expected to supply nearly 31 million standard cubic meters per day of gas directly to Gujarat while bypassing the Strait of Hormuz.

The India-Oman relationship has transformed from a conventional Gulf trade partnership into a crucial stabilization corridor for India's energy flows and supply-chain resilience during the ongoing Gulf crisis, with Oman's growing role as India's dependable gateway to West Asia during periods of geopolitical disruption—functioning as an alternative maritime and logistics corridor when the Strait of Hormuz becomes risky or congested.

What Changed This Week

Oil prices climbed modestly after fresh hostilities between the U.S. and Iran, according to OilPrice.com, with Iran firing missiles at Kuwait and Bahrain and the U.S. firing on and disabling an oil tanker heading toward Iran. But the muted response—Brent up just over 1%—underscores how much the market has already priced in continued disruption. China's import data for May, showing crude purchases falling to decade lows, confirmed that the world's swing consumer is still drawing down inventories rather than competing for scarce barrels. And the UAE's announcement that its Hormuz-bypass pipeline is nearly half complete signals that Gulf producers are planning for a post-Hormuz world, whether or not the strait fully reopens.

What to Watch

China's June import data, due in mid-July, will reveal whether Beijing has begun restocking—or whether it can stretch its drawdown into the third quarter. The next IEA Oil Market Report, scheduled for June 12, will update demand destruction estimates and could revise its 2026 forecast further downward. And any movement in U.S.-Iran peace talks—Bloomberg reported discordant signals this week—could shift the timeline for reopening the strait, though many experts, including former U.S. government officials, believe there is little chance of a return to a completely free Strait of Hormuz, now that Iran has discovered its single biggest element of leverage. The UAE's West-East Pipeline is expected to reach full capacity in 2027, but until then, the world is running on borrowed time—and borrowed barrels.