The biggest oil supply shock in decades has entered its fourth month – with no resolution in sight as neither the U.S. nor Iran appears willing to budge – yet the market remains surprisingly calm. This disconnect reflects an uncomfortable reality: the biggest drivers of today’s energy market are a host of unknowns.
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The renewed strikes between Iran and Israel over the weekend have sent oil prices up over 4% to $98 a barrel on Monday, but Brent crude remains well below levels seen only a few weeks ago and comfortably within the range of the past two decades.
This has happened even though the Strait of Hormuz – the world’s most critical oil chokepoint – has remained largely shut for more than three months, disrupting flows equivalent to roughly 13% of global supply.
A large part of the market’s sanguine mood reflects expectations that conditions in the Gulf could change overnight. U.S. President Donald Trump’s repeated assertions in recent weeks that a deal with Iran is imminent have helped cool prices.
Yet there is little evidence that Washington and Tehran are moving closer to a durable agreement, with both sides continuing to strike targets across the region.
Even if a formal reopening of Hormuz occurs in the next few weeks – a scenario that is hardly the base case – this would not instantly translate into a full recovery of flows. Shipping is governed as much by risk assessments as by geopolitics. Tanker operators, insurers and traders are likely to remain cautious about re-entering the Gulf, fearing vessels could once again become stranded in the event of renewed hostilities.
While there are increasing indications that more cargoes have been leaving the Gulf in recent weeks using stealth channels, these are short-term solutions being employed by desperate operators, not a long-term strategy for the world’s largest energy companies.
What’s more, this opacity speaks to the larger problem. Oil traders are mostly operating in the dark, regarding both supply and demand, raising the risk of a nasty surprise if their assumptions prove faulty. HOW LONG CAN STOCKS GO? The first major unknown is exactly how long global inventories can last. Governments and companies have tapped commercial stocks and strategic reserves at an unprecedented pace since the conflict broke out on February 28.
Global crude and fuel stocks fell at a pace of 5.27 million barrels per day in March, accelerating to 8.62 million bpd in April and likely approaching 9 million bpd in May, according to the U.S. Energy Information Administration. Draws could rise further to around 11 million bpd in June as seasonal demand increases ahead of the Northern Hemisphere summer.
These are extraordinary numbers – equivalent to running down Saudi Arabia’s pre-war production every single day. The United States offers a stark illustration. Total U.S. crude inventories, including the Strategic Petroleum Reserve, have fallen by roughly 10% this year to 1.5 billion barrels – the lowest since 2004.
At Cushing, Oklahoma – the delivery point for West Texas Intermediate futures – stocks have dropped to 22.4 million barrels, the lowest since January. If draws continue at the recent average pace, inventories could soon fall below 20 million barrels, a level widely seen as the minimum operational threshold needed to keep the hub functioning smoothly.
The market has proven remarkably adaptable in recent months and could continue to find workarounds, but storage systems are not infinitely flexible. Once those “tank bottoms” are approached, prices would typically be expected to shoot up to reflect scarcity.
THE CHINESE ENIGMA
Another key unknown is China. The world’s second-largest oil consumer has sharply reduced its seaborne crude imports in response to higher prices, with imports falling in May to 6.36 million bpd, the lowest level in nearly a decade.
That decline has provided significant relief to other importers by easing competition for scarce cargoes. But it has also introduced a new layer of uncertainty.
First, China could decide to go back into the market at any moment.
China does not publish timely or comprehensive consumption data, leaving the market largely in the dark about how much demand has actually been affected.
Chinese refiners may have drawn on commercial inventories to offset lower imports, or Beijing may have begun to tap its vast – but opaque – strategic reserves.
If the latter is true, global supply could be tightening more than traders currently estimate. If not, the drop in imports may signal a sharper-than-expected slowdown in demand.
Either way, this lack of clarity regarding a fundamental driver of the global supply-demand balance at such a precarious moment is troubling – and could leave some suddenly finding themselves on the wrong side of a trade.
THE INVISIBLE BALANCING FORCE
The difficulty of gauging China points to a broader problem: demand is inherently harder to measure than supply.
While the industry has developed increasingly sophisticated tools to track crude production, refining activity and tanker movements – often in near real time – consumption remains fragmented across billions of users and is often only reported with significant delays. In some cases, such as China, it is not reported at all.
As a result, estimating the level of demand destruction caused by the current supply shock has become an exercise in inference.
In theory, the mechanism is straightforward: tightening supply depletes inventories, higher prices follow, and demand is gradually destroyed. In practice, that process is messy, uneven and difficult to observe in real time.
The International Energy Agency last month revised its global demand outlook dramatically, forecasting it to contract by 420,000 bpd in 2026, compared with a pre-war expectation of 1.3 million bpd in growth. Consumption is expected to fall by 2.45 million bpd in the second quarter alone.
Some analysts and trading houses are more bearish, estimating that demand could have declined by as much as 5 million bpd in May.
Whichever figure is correct, the longer the Hormuz disruption persists, the greater the drag on economic activity and fuel demand.
The oil market today appears remarkably relaxed in the face of a prolonged and unprecedented disruption.
Part of that may be fatigue after months of volatility, but it also may reflect how little anyone currently knows about the true state of the oil market – including the experts – and how much pricing is based on sentiment and expectations.
That is a precarious foundation.
(The opinions expressed here are those of Ron Bousso, a columnist for Reuters.
(Ron Bousso; Editing by Aidan Lewis)
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