The mounting disruptions in oil markets

[Music] Welcome back to the IAA's podcast Everything Energy. I'm Dan Hewitt. This week we're looking at the IAA's oil market report. Each month it provides the authoritative view of what's happening in global oil markets, including supply, demand, stocks and prices. And since February the market has had a lot to contend with. The war in the Middle East has moved from open conflict to an uncertain cease-fire. The upshot is that with the plunge and shipping through the straight-of-hall moves, we're now facing a threat to energy systems that is the IAA executive director has warned, bigger than the twin shocks of the 1970s and the 2022 energy crisis combined. But what are the real world impacts of the disruptions in the oil markets? We're going to use the latest IAA report to unpack where the markets are now and where they might be heading. For this episode we spoke to two senior oil analysts from the IAA, Rebecca Schultz and David Martin. All right, David Martin and Rebecca Schultz, thank you so much for joining us today. Now let's just start by reminding ourselves exactly what the oil market report is. So David, maybe you could tell us, where does the information come from? What are some of the ways it's used? So the oil market report is a monthly publication that acts as a way of communicating to our member governments, our stakeholders, our current analysis of the oil market. So typically it looks at what I would call the sort of short term. So it's really only sort of 12 to 18 months out generally. It also updates our member states and our subscribers on recent developments in demand, supply, refining, stocks and prices. And provides a lot of data in the summary format of how member countries oil markets have evolved in response to their most recent data submissions. OK, now let's turn to the war in the Middle East. And that's obviously been going on since late February. So what's been the impact on the amount of oil flowing through the straight-of-war moves? And perhaps Rebecca, you could tell us how that compares to the start of the war as well. Thanks, Dan. And thanks for the chance to come and talk with you today. Perhaps a bit of background on the straight itself, just to set the scene. The straight-of-war moves is a narrow sea passageway that separates the Arabian Peninsula from Iran. It's only about 54 kilometers wide. So it's really quite narrow. And the way that it's structured is-- there are two two-mile lanes. One, effectively, that goes into the Gulf and one that goes out of the Gulf. And it's a hugely important waterway, not just for oil and gas, but for fertilizer and boxide and sulfur and helium. And every day, last year, in 2025, on average, about 20 million barrels of day of oil transited through the straight-of-war moves. So about 15 million barrels of that was crude and condensate. And so that's the input that goes into refineries. And then there are another 3.5 million barrels a day of refined products. So oil that's been refined in the Gulf, that is shipped out largely to Asia, but also to Europe, Africa, North America, elsewhere. And then about 1.5-- just under 1.5 million barrels a day of LPG-- that largely goes to Asia, so especially India and China. So it's an incredibly important waterway for oil, in particular, and gas. After the start of the war, effectively, so from about February 28th, essentially, the straight was closed. And from that time, over the month of March, the amount of oil that's transited through the straight has declined by about 90%. So we calculate that it's about 2.3 million barrels a day. So that really impacts customers, especially in Asia, but global supply chains, and it'll touch almost everyone. In addition, as the straight was closed, it effectively stopped flows of tankers going in and out. And so we have around almost 200 vessels that are filled with oil that filled up once the straight was closed. And then you've got about another 140 vessels that are essentially empty that are waiting to fill up into to exit the straight. So there's a lot of oil and a huge number of vessels, and not just oil vessels or LNG tankers themselves, but also other cargo that effectively is locked on both sides. OK, let's think about the wider response to these changes. So how far have other supply routes or even countries been able to compensate for some of that disruption? Before the war, the bypass routes that were able to avoid the straight of her moves were averaging just below 4 million barrels per day. Most recently, so in early April, we saw those flows go up to about 7.2 million barrels per day. So that primarily comes from Saudi Arabia's East West Petroline or Pipeline, and also via the UEE's Habshan Food Share apport. OK, so that's a sense of some of the disruptions that we've seen. But what does that mean for supply right now? What's the case? It is a huge disruption. So we estimate that supply launched by about 10.1 million barrels per day last month in March. And that's the largest supply disruption that we have on history. And it's found about 97 million barrels per day. We're looking ahead, if the straight of her moves does not open up, if we have flows on the same level at the end of March throughout the month of April, we think it's actually going to fall another 2.9 million barrels per day. Right. Now, let's think about what might happen when, and if, the straight of hallmuse, reopens. We know how much that uncertainty there is around this scenario. But we're back, perhaps you can explain how quickly we can expect markets to go back to the sort of flows that we saw before the start of the war. When we start to think about the restart of flows, I mean, we're coming from a current state where you only have around four, maybe five tankers flowing through each day. And that was before the latest US blockade. Within the Gulf, we have around 200 tankers that are filled with oil, another 150 tankers that are ballasted. So first, we need to start moving out those tankers that are full of oil and start moving them out of the straight of hallmuse, getting them out of the Gulf and onto their destinations. Now, unlike this way as canal, there's no queuing system associated with the straight of hallmuse. And so trying to understand the order of who goes first and when, and also the security considerations are companies even allowing or crews even willing to make some of these initial routes. Once they start flowing, if to move those oil and tankers out of the Gulf, then because we have effectively filled up most of the oil storage in and around the Gulf countries, you have to start draining that storage down. And so we anticipate from discussions with industry that a lot of the tankers that are in the Gulf will start to fill up. We move those out. And once we have a bit more available storage, then we can start actually increasing production from fields. And we really need line of sight of those consistent loading programs to be able to restart the upstream field. So for example, with Iraq, Iraq at the start of the war, and typically it has a very, very little storage, especially at its southern ports in Basra, only around three days or so. And so you need to have those consistent loading schedules to be able to have confidence to start opening up your wells again. And then across the Gulf, about half of the fields are quite normally pressured or pressured enough that we think that they'll be able to flow quite quickly within a few weeks, to within a month we think after the staging of those oil tankers getting out, the empty ballasted tankers filling back up and starting to get out, then you can start the restart of the fields. And we think about 50% of the production could technically, if it has been shut in a prudent way, if we don't have damage to those fields, then we think that it can actually restart within a few weeks. And we think about 80% can restart within about four to six weeks after that initial flow and the initial resumption of normal loading schedules, if you will. We do think from an upstream perspective that there's probably around 20% of the production that might be very depleted or as much heavier. And it's going to take re-normalization of supply chains of companies that have effectively removed their workers from the fields, from the region, to get back into the region, to reassess what's actually happened, take a look at the damage, start to make plans. So we do expect that there may be a bit of a long tail for some of this production to come back. And it might be that some of the production at the end of the day doesn't necessarily fully come back. But we think most will be able to come back, provided we don't have further major disruptions to the oil fields, the processing plants, the pipelines themselves. OK, so that's thinking about how you restart the flow of oil itself. But perhaps we can just think about how you restart the process in refinery. So David, maybe you could just explain a little bit about the disruption in terms of how much production has been going on at the moment and how long it'll take to get it back to pre-war levels. OK, so when we think about the impact on refining, there's two big impacts here. Firstly, refining in the Gulf. We've seen a lot of refinery's attacked by Iran. And that's affected production or processing of crude in countries like Saudi Arabia, the UAE Q8. So we've seen refineries damaged and shut down. Secondly, a lot of refinering capacity in the Gulf is aimed at exporting products to world markets. And so with the straight closed, we've seen a big drop in exports, almost complete export cessation here. And that means that markets such as Europe don't get the jet fuel, though they want. Asia doesn't get a lot of the nap through it needs for petrochemicals. And so there's a real impact on product markets. And then to outside the Gulf, we've got refineries in Asia, who are reliant on mid-least and crude for a large part of the crude slate that they're processing. So those refineries are having to find or attempt to find alternative sources of crude to process. And not all countries have the benefit of having government-held stocks, so strategic reserves that they can draw on in emergencies. So you've got these two-fold impacts within the Gulf and then what's going on outside the Gulf. So what we think now is going on is that runs crude processing is down by about 6 million miles a day. So that is going to start to tighten up product markets because those refined products, the petrol, the diesel, the jet fuel, just as being in manufacture of the same pace as it was previously. When we get the straight reopened and vessels can come in to load and we see as an end to hostilities, then we can look to restart the refining processes that are going on in the Gulf. Unlike a lot of the upstream where there's quite complex geology, these are manufacturing processes that can be brought from sort of cold start to fully normalize within a couple of weeks, except where we have refineries that have suffered damage. And we're currently assuming a million miles a day of refining capacity may not make it back online by the second half of the year. OK, now let's have a think about forecasts. So we've spoken about a lot of the disruptions, but where has that left the IA's forecast for the supply of oil for 2026? Rebecca, maybe you could answer that. When you look at the oil supply forecast for 2026 and so in our base case forecast, assumes that the straight remains effectively closed, essentially until the end of April, very beginning of May. And then we start that sequencing of of restart. So that equates to about a 1.5 million barrel a day drop for the overall for 2026. Now, if the straight remains closed for longer period of time, or there are more impacts, more attacks that hit energy infrastructure, then we might see that decline even further. And could you put that into some context for us? One was the last time that we saw a drop across the whole year. How rare is that? When we look at the monthly drop that we saw in the month of March, I mean, that was really historic. And so that really goes back to COVID-2020, where initially it was a demand side response followed by a supply side reduction. This in 2026 though in March, we're seeing that is significantly more. So we've spoken in this podcast a lot about the supply side. Now I want to move on to the demand side. And I think the best way to start this section is to think about the sectors and the industries that have been particularly hit. So maybe David, you could talk us through the industries and sectors that have been most exposed to these disruptions. There are three sectors that come to mind. First off, refining. That's obviously been very heavily affected by the loss of the crude supplies from the Middle East. Oh, we also highlighted that the loss of product exports from the Gulf, notably Naphthrin, LBG, which are both substantial feedstocks for petri-comical industry. So we've seen a big pullback in the petri-chemical activity, particularly in Asia because of the lack of feedstock. But we've also seen impacts on things like airlines. So a lot of the Middle East flag carriers suspended operations at the start of March for several weeks. And so we've seen a dip in jet fuel demand, not only in the Middle East, but also the reciprocal flights coming back from Europe, from the North America, from Asia. And so those are sort of three of the key sectors that have been hit in the short term. And to put that into context, we get data with a lag, but actually there are some countries that report very quickly. So we can see that, say, in India, this lack of product supply has led to a 12 and a half percent drop in March in LPG use. And that's domestic cooking, but also its petri-chemicals. Now let's just think about the impact that this has had on prices, because I'm sure people will have seen and heard the headline changes in the price of oil and gas. But what does the report tell us? Okay, so when we think about oil market prices, I mean, the first thing to say is that the markets are having to deal with an incredibly high level of uncertainty, and that's resulted in enormous price volatility, which makes life difficult for people in the industry who are trying to buy, sell crude or products. But I think the real impact for consumers is we've seen prices rise generally quite steeply. So when we think about crude, which of course, you're only a refiner cares about crude, but the global benchmark is up by about two thirds from pre-conflict levels. Now, when we think about products, things like petrol prices have risen by nearly 50%. So they've actually lagged the gains in in percentage terms that's happening crude, whereas things like diesel and jet fuel are up anywhere between 70 to 95%. Now, to put that in a bit of context, of course, consumers, when they're filling up their cars with petrol or diesel, they don't see that level of price increase because there are things like taxes which buffer them from the day-to-day price movements. But yeah, the higher prices everywhere. Okay, so where does this leave us? What has been the impact on demand? So demand is taking a hit here from the higher prices, but also the slower economic growth that is being built into the world economy at the moment. So we've cut our demand forecast, and actually we're now expecting demand to contract this year by 80,000 versus growth, which was our previous set of assumptions. And that's really concentrated in the second quarter of this year for the moment because of the way we view the duration of the conflict and how quickly things will start to normalise. And can you just put that into a bit of context for us when with the last time we saw that sort of drop? Well, the most recent example, of course, was 2020 when the COVID virus really shut down a large pass of global air travel and people's use of oil shrank very rapidly. So that's the last time. Other than that, you'd have to go back to things like the global financial crisis, nearly two decades ago before we see these annual contractions. So it's a very rare occurrence. I also want to ask you some questions about global oil stocks. Now we've spoken in other podcasts about the role the IEA has played, coordinating the release of the 400 million barrels of oil. But what do we see now in terms of stocks and really in other words, how much is there in reserve? Globally, we think there's about eight billion barrels of oil in the world. So in a 100 million barrels a day of demand, it's about 80 days worth of consumption. Now, as Rebecca said earlier, the loss of crude out of the Middle East Gulf is 10 million barrels a day and there's a further five lost from products. So we're basically drawing down stocks at a very rapid rate. And that's, you know, part of the dislocation in the market that's happening now. So around half of the eight billion barrels, call it four billion barrels is held by IEA member countries. And of that four billion barrels, 1.8 is effectively held either directly by governments or by industries on behalf of governments in reserve. Now we've already agreed or our member states have already agreed to release 400 million barrels to the market. And I think there's adequate capacity for us to do more if it's needed. All right, Rebecca Schultz and David Martins. Thanks so much for talking to me today. Thanks Dan.