Oil Paradox: Prices Stable Despite Hormuz Blockade

Global oil markets are experiencing a peculiar paradox: prices have remained remarkably stable despite a significant supply shock caused by the war with Iran and a three-month blockade of the Strait of Hormuz. Analysts and investors are puzzled by this unexpected calm.

JPMorgan reports that shipping activity in the Strait of Hormuz has plummeted to just 15% of pre-war levels. However, this drastic reduction has not triggered the anticipated surge in oil futures prices. One leading theory attributes this to "clandestine flows" of crude oil bypassing the blockade. Experts speaking to CNN suggest that oil tankers are disabling their tracking transponders to evade detection.

“

Despite the ongoing maritime blockade and the dramatic reduction in commercial shipping, unexpectedly large quantities of crude appear to continue to pass through.

According to JPMorgan's Natasha Kaneva, these clandestine flows amounted to 2.1 million barrels per day in late May. She noted in a research note that "despite the ongoing maritime blockade and the dramatic reduction in commercial shipping, unexpectedly large quantities of crude appear to continue to pass through." This suggests a significant, albeit hidden, volume of oil is still moving.

“

We assume that traffic in the Strait of Hormuz is running between 0% and 10% of pre-war flows, but with this leakage it might be a little higher.

Bob McNally, founder of Rapidan Energy Group, told CNN that these hidden flows might be mitigating the crisis. He estimates that while Hormuz traffic might be between 0% and 10% of pre-war levels, the "leakage" could be slightly higher. Similarly, Jan Stuart of Piper Sandler estimates that about 2.9 million barrels per day passed through the Strait in May, with 900,000 barrels moved by "ghost" ships lacking active transponders. Stuart commented that these "ghost flows" are helping to moderate the crisis, leading to a better-than-expected outcome.

Beyond these hidden movements, other factors contribute to market stability. Piper Sandler calculates that 4.5 million barrels per day exit the Persian Gulf via alternative routes, notably Saudi Arabia's East-West pipeline to the Red Sea. Furthermore, China has significantly reduced its crude imports, drawing from its substantial reserves. This decreased demand from a major consumer has eased pressure on global prices. Kaneva also points to larger-than-officially-recognized demand losses and higher inventories as reasons for the market's current tranquility, keeping prices around $100 per barrel despite the geopolitical tensions.

“

The ghosts, or clandestine flows, are helping.