Yardeni Research | Is Less Dire Strait Easing Market Fears?

💡Energy and financial markets are reacting to the Middle East war remarkably well, with investors believing the conflict will be short-lived and focusing on the fact that lost physical oil supplies are about half as much as they could have been. The price of oil is around $100 a barrel, remaining below its 2022 peak of $120. The S&P 500 is down only 5.0% from its January 27 record high, and the 10-year Treasury bond yield has slightly increased to 4.25% from 3.95%. Gold prices have held steady around $5,000 per ounce, indicating a lack of panic.

💡President Trump's stance on the duration of the Middle East war is non-committal regarding a rigid timeline, stating during a Friday interview that he would know the war was over when he "feels it in his bones." This uncertainty about his endgame has contributed to market volatility. Financial markets appear to be anticipating a short war, potentially believing Trump will soon declare victory, partly due to upcoming midterm elections where a prolonged conflict could cost Republicans congressional majorities.

💡Financial markets have not shown more concern about the Strait of Hormuz situation because they are likely discounting the prospect of a short war, despite recent escalations. Investors also anticipate that oil will continue to "leak" out of the Persian Gulf and that additional supplies will be sourced from other regions. The actual physical supply disruption of 9-10 million barrels per day (mbd) is about 50% less than the widely feared 20% of global consumption that typically passes through the Strait, leading to a less panicked market response.

💡Iran's 'safe passage' deals with China and India significantly impact oil flow by allowing a substantial portion of crude oil to continue transiting the Strait of Hormuz, thereby fragmenting international opposition and mitigating the overall impact of the blockade. China, the world's largest crude oil importer, receives roughly 45%-50% of its total oil imports through the Strait and accounts for 38% of oil exports passing through it. Nearly 91% of Iran’s oil exports are destined for China, and India accounts for 15% of Iran's oil exports (2.5-3.0 mbd), helping to sustain global oil supplies despite the conflict.

💡Saudi Arabia’s Petroline and the UAE’s ADCOP Pipeline mitigate Strait of Hormuz closures by providing significant bypass infrastructure that can operate at maximum capacity to circumvent the Strait. Saudi Arabia’s Petroline, an East-West pipeline, can move up to 7 million barrels per day (mbd) to the Red Sea and is currently pushing approximately 5 mbd into the market. The UAE’s ADCOP Pipeline bypasses the Strait to the port of Fujairah, carrying roughly 1.5 mbd. Combined, these two routes "save" at least 6.5 mbd of oil that would otherwise be stranded, reducing the overall supply disruption.

💡Approximately 9-10 million barrels per day (mbd) of physical oil supply has been disrupted due to the Strait of Hormuz blockade, which is roughly equivalent to losing one Saudi Arabia. This disruption is the largest in history but is 50% less than the widely cited risk of 20% of global consumption, or 20 mbd, that typically passes through the Strait. While 20 mbd theoretically flows through, actual production "shut-ins" are estimated at 8 mbd of crude and 2 mbd of condensates/natural gas liquids, largely impacting Iraq and Kuwait due to their lack of significant bypass pipelines.

💡Strategic petroleum reserve releases play a crucial role in stabilizing oil markets during supply disruptions by injecting additional crude into the global supply. On March 11, the International Energy Agency (IEA) authorized the release of 400 million barrels from emergency reserves, adding roughly 2-3 million barrels per day (mbd) of supply over the next few months. This, combined with the US's additional release of approximately 1 mbd of "stranded" Russian oil over the next month, helps bridge the global supply gap and cool prices, which recently hit $103 per barrel.

💡Global demand forecasts act as a 'safety valve' during supply disruptions by providing a buffer against immediate physical shortages. High prices and the war itself are already destroying demand. The IEA recently cut March/April demand forecasts by 1 million barrels per day (mbd) due to massive flight cancellations in the Middle East and industrial slowdowns in Asia. Before the war began in February, the market faced a 1.5 mbd surplus. This existing surplus and the reduced demand must be absorbed before a true physical shortage occurs, easing market pressure.

💡Iran has set specific conditions for ships to pass through the Strait of Hormuz, stating that it is "only closed to the tankers and ships belonging to our enemies"—specifically naming the US and Israel—while claiming other ships are "free to pass." However, many ships are staying away due to security concerns. All permitted ships, such as Indian-flagged LPG carriers allowed due to "historical relations and common interests," must coordinate directly with the Iranian Navy to ensure safe passage, particularly to navigate around naval mines Iran has reportedly deployed.

💡The IEA estimates that actual oil production 'shut-ins' due to the conflict approximate 8 million barrels per day (mbd) of crude and 2 mbd of condensates/natural gas liquids. This total of 10 mbd represents the true physical supply loss, as opposed to the theoretical 20 mbd that normally flows through the Strait. Many producers are filling domestic storage tanks while awaiting clearance, indicating that not all un-exported oil is a complete loss. Iraq and Kuwait are identified as the hardest-hit oil producers, lacking significant bypass pipelines.