The global oil system can no longer absorb shocks the way it could three weeks ago, Rystad Energy warned in a market update sent to Rigzone on Thursday.
“For nearly four weeks, the crude oil market has displayed remarkable resilience, holding together in the face of a 17.8 million barrel per day trade flow lost out of the Strait of Hormuz,” Rystad said in the update.
“The relatively muted price reaction was possible because the market entered this crisis with a heavily buffered system. But that buffer has disappeared,” it added.
Rystad warned in its update that “any secondary disruption that would have generated a linear, manageable price response in a buffered system … would now hit a market with no absorptive capacity left”. Offering examples of these kinds of disruptions, Rystad put forward an outage at the CPC pipeline from the Caspian through Russia, an active hurricane season, and infrastructure damage at Yanbu or Fujairah.
“The floor has moved up, so has the ceiling,” Rystad said.
“And critically, the distance between a routine supply event and a disproportionate price move has collapsed. This is no longer a market that is tight for a couple of weeks, it is a market that will be fragile for longer,” it added.
Rystad warned that this distinction is what the crude oil price does not yet fully reflect.
“Before this conflict, the world was expecting a crude oil surplus of roughly 3.0 million barrels per day this year, onshore and offshore inventories were ample, and there was healthy spare production capacity, albeit very localized,” it highlighted.
“Those combined ‘extra’ barrels allowed the market to absorb a supply shock that, in any other starting configuration, would have caused prices to react more violently,” it added.
“Those buffers are now largely consumed, and the system that absorbed the initial shock is not the system operating today,” it warned.
Rystad Energy said in its update that nearly 500 million barrels of total liquids have been lost in the disruption so far.
“The combined policy response of strategic petroleum reserve (SPR) releases by the International Energy Agency (IEA) and waivers of sanctions against Russian and Iranian crude amount to about the same volume,” it highlighted.
In the update, Rystad Energy Chief Oil Analyst Paola Rodriguez-Masiu said, “the oil market did not underreact to the disruption in the Strait of Hormuz; it absorbed it”.
“For nearly four weeks, markets have shown remarkable resilience in the face of disruption, supported by a combination of pre-war surplus, crude-on-water, and policy barrels that provided a temporary buffer and kept prices contained. That phase is now ending,” the analyst added.
“With spare capacity largely trapped behind the Strait, and inventories already drawing down, the system has shifted from buffered to fragile … When the next disruption hits, whatever its source, there will be little left to absorb it,” Rodriguez-Masiu continued.
In a Skandinaviska Enskilda Banken AB (SEB) report sent to Rigzone on Thursday, Ole R. Hvalbye, a commodities analyst at the company, highlighted that Brent “has overnight pushed back above the $100-mark, currently trading around $106 per barrel, up eight percent since yesterday’s low point”.
“It’s all about headlines, and what the market can read from day 26 of the war in the Middle East,” he added.
Hvalbye noted in the report that “the latest from the battlefront suggests we’re no closer to a resolution”.
“Iran yesterday formally rejected the U.S. 15-point ceasefire proposal and laid out its own five conditions for ending the war: including a demand for recognized sovereignty over the Strait of Hormuz and war reparations,” he highlighted.
In a statement sent to Rigzone today, Aaron Hill, Chief Market Analyst at FP Markets, highlighted that Brent and WTI were higher this morning.
“I believe most of this rise is due to the markets questioning the ‘ongoing talks’ claims from Trump,” Hill said.
Rigzone has contacted the White House and the Iranian Ministry of Foreign Affairs for comment on Hvalbye and Hill’s statements. At the time of writing, neither have responded to Rigzone.
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