The International Energy Agency announced: it will release 400 million barrels of oil into the economy

The Straits of Hormuz were blocked by Iran with attacks from the coast, and in the last day four oil tankers that tried to make the crossing were attacked. Three sailors from one of the tankers are still missing. Iranian tankers on their way to China managed to make the crossing out, while carrying millions of barrels of oil. But the Iranians are also threatening to block the straits, which could hermetically block the passage until operations are carried out to remove the sea mines. The US, in response, bombed Iranian ships that could be used to lay such mines.

The price of oil, which was around $60 at the beginning of the year and reached $73 per Brent barrel on the eve of the war, peaked at $116, then fell due to statements by US President Donald Trump that the war would not last long, and that the US would take care of opening the straits. But after a temporary drop to around $85, it rose above $90 again, and now after the Energy Agency’s announcement it has gone back down a bit. However, the concern is not necessarily the temporary increase in prices now, but more long-term disruptions in global oil supply.

Or Azran, a research economist in the economics department at Bank Leumi points out that the comparison between the 400 million barrels that will be released now and the 181 million barrels released by the International Energy Agency in 2022 is not the whole story, because at the same time the USA also released another 90 million barrels from its national stockpile, so that a total of 270 million barrels went on the market. And yet, the amount that is going out now is the largest ever.” The dramatic amount is probably due to the fact that at the time the main impact was on Europe, and now the US is particularly sensitive to changes in oil prices – and is pressing for as aggressive a response as possible.

“The stocks cannot be a substitute for a hermetic closure”

Will the measure help moderate the sharp increases? Or Azran, a research economist in the economics department at Bank Leumi, points out that “it depends on how long the strait will be closed. The stocks cannot be a substitute for a long-term hermetic closure of the strait. 400 million barrels is about 20 days of regular transit through Hormuz. As long as it is closed, prices will not drop, and if it remains closed for a long time and the stocks are depleted, the price will rise again.”

Azran adds that “but of course there are other effects in all directions: on the one hand, Saudi Arabia diverts oil to its west coast through an inland pipeline, but it has a capacity of only 5-7 million barrels per day compared to 20 million in Hormuz. In addition, Iran threatens to damage the Gulf’s production infrastructure as well.”

And what about the emergency reserves? China leads with huge reserves that are estimated between 1.1 and 1.4 billion barrels, which will be enough for many months of consumption. “This takes a very significant consumer out of the market, moderate the price,” says Azran, comparing it to the American reserves which now stand at about a third of that, 416 million barrels. Less than there were at the time of the Russian invasion of Ukraine, when the American strategic stockpile was about 660 million barrels.

Regarding the opening of the strait itself, Trump did suggest that the US Navy provide armed escort to the merchant ships, but the US Navy for the time being refuses to do so. In the end, this will result in “a one-time jump in inflation, and hence – lowers the expectations for the interest rate cut”, adds Azran.

A twice as bad crisis

The current oil crisis, in the framework of which Iran blocked the Straits of Hormuz, which transport about 20% of the world’s oil supply, Twice as bad than the second event at its worst in 1956 (“Sinai War” in Israel, “Suez Crisis” in the world) – this is according to an analysis by the Market Research Company Rapidan Energy. And worse, there is almost no excess production capacity that can compensate for this, unlike several previous crises in the past.

However, other studies indicate that the world economy’s dependence on oil has decreased significantly in recent decades, which moderates the economic damage relative to the unprecedented magnitude of the shortage. Even the USA, which was then dependent on oil imports, is today an exporter itself.

Still, gas prices in the US have already jumped significantly, and the markets are down, which could weigh heavily on President Trump at the political level ahead of the midterm elections at the end of this year. Tried to press Ships still have to cross the straits, but the attacks from Iran that have already hit several tankers recently will probably stop that for now.