Asia's Oil Industry Sees No Quick Fix for Strait of Hormuz Disruption

Asia's crude oil industry has a clear view of how the crisis triggered by the Iran conflict should end, but little expectation that its preferred outcome will materialise. At this week's APPEC conference in Singapore, delegates agreed that the Strait of Hormuz must be reopened safely and sustainably — and that this would require the United States to step back from the Gulf and allow regional countries to resolve the situation created after the US and Israel attacked Iran on February 28.

That wish is widely seen as unrealistic. The conflict shows no sign of moving towards a political settlement, and industry participants are instead preparing for a prolonged disruption to Middle East supplies.

Before the bombing campaign began, nearly 20% of global crude oil and refined products, along with a similar share of liquefied natural gas, passed through the narrow waterway linking the Persian Gulf to the Gulf of Oman. Volumes fell to near zero in the weeks after the conflict started as Tehran threatened vessels attempting transit. Flows have recovered somewhat but remain well below pre-war levels.

Estimates of how much oil is now moving through the strait vary, as do figures for volumes rerouted to Middle Eastern ports outside the Gulf. Even the most optimistic assessments put flows at only about 75% of pre-war levels, leaving the global market short of roughly 5 million barrels per day of crude and refined fuels. Less disputed is data showing Asia's imports of light and middle distillates are nearly 30%, or about 2 million bpd, below pre-conflict levels — a sign that the sharpest strain is in refined product supply.

Initial confidence that the conflict would be resolved within weeks or months has faded. Delegates, including Middle East producers, trading houses, shippers and refiners, now discuss how to operate through a long disruption. The prevailing view is that a political agreement is unlikely because the conflict has become a contest of egos, with neither US President Donald Trump nor hardline leaders in Tehran able to accept less than what they would regard as victory. One delegate observed that a settlement would require regime change in Washington or Tehran, and that Washington was the more likely of the two — a view echoed by many at the conference. That could mean waiting up to two-and-a-half more years until Trump's term ends, though pressure could build if Democrats retake one or both houses of Congress in November's midterm elections.

For now, the industry's best hope is a least-worst scenario: constrained and risky flows through the strait, punctuated by occasional missile and drone attacks. In that case, Asia's refiners can probably secure enough crude, but lost refining capacity in the Middle East and in Russia — the latter due to Ukrainian attacks — keeps product premiums extremely high. Market attention has shifted away from Brent futures towards the discounts for barrels inside the Strait of Hormuz and the premiums for barrels outside that can move freely. Persuading a trader to load inside the strait requires a discount large enough to cover insurance costs that have jumped from about 5 US cents a barrel before the conflict to around $2.50, and freight costs of roughly $30 a barrel, up from about $6, to move cargoes from the Gulf to North Asia. The result is that headline crude prices understate the true cost of securing cargoes.

Delegates avoided discussing worst-case scenarios such as widespread destruction of energy and civilian infrastructure across the Gulf, suggesting they do not expect that outcome. Yet six months ago, the same industry expected the war to end soon.