When the war with Iran began on Feb. 28, tanker traffic through the Strait of Hormuz came close to a standstill.
The International Energy Agency called it the largest oil supply disruption in the history of the global market. Prices jumped within days. Goldman Sachs raised its oil forecasts in response.
Few executives sounded more worried than the head of Shell. On April 28, CEO Wael Sawan told Bloomberg that supply would likely stay tight for months and possibly for more than a year.
Emergency stockpiles were being drawn down to cover the gap. Five months on, he has better news to share, though he is not ready to call the crisis over.
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Sawan puts the Middle East oil flow at about 80%
Speaking at the Energy Intelligence Forum in London on Oct. 6, Sawan said oil flows from the Middle East have climbed back to roughly 80% of their pre-war volumes, Bloomberg reported. It is one of the clearest readings yet on how far the region’s exports have come.
He gave the credit to the producing countries themselves. In his telling, the rebound shows how determined they have been to keep meeting their supply commitments. Sawan’s assessment carries extra weight because it comes from the head of one of the industry’s largest companies.
Sawan drew a wider lesson from the episode. Governments, he argued, have been reminded that national security depends on energy security. No industrial or economic strategy works without a solid energy plan underneath it. The comment was aimed as much at policymakers as at oil traders.
The change in tone is striking. In May, the same executive described a crude shortage approaching a billion barrels that was getting deeper every day, as reported by TheStreet. A market that is short of oil does not heal quickly, which makes the rebound all the more notable.
Just a few executives sounded more worried than the head of Shell.NurPhoto / Getty Images
The road back has not been a straight line
The first opening came through diplomacy. In May, President Donald Trump held off on further military strikes against Iran after Saudi Arabia, Qatar and the United Arab Emirates asked for a pause to pursue ceasefire talks. Gasoline prices were still climbing at that point.
By late June, a U.S.-Iran agreement had calmed fears about supply through the strait. Goldman Sachs cut its estimate of U.S. recession risk to 15%, down from 25% after the Iran-led oil shock. Average gasoline prices had also fallen through the month.
Oil that had been frozen in the Gulf since February started moving again once the strait reopened. In early July, JPMorgan’s commodities team, led by Natasha Kaneva, warned of a temporary glut. Chinese buying had not come back, according to TheStreet. Brent crude had fallen sharply from its May level by then.
Then came a setback. Goldman Sachs reported in August that Gulf oil exports had fallen back to about two-thirds of prewar levels, well below where they had been in early July. Tanker capacity in the Red Sea had also shrunk after the Houthis announced a blockade. The 80% figure Sawan cited on Oct. 6 is, in effect, a second recovery.
Why the cushion may not last
Sawan was careful not to oversell the rebound. Flows have improved, he said, but they are not back to normal. The squeeze would also have been worse without weaker demand from China and extra production elsewhere.
Time is the real risk in his view. The longer the war drags on, the harder it becomes for markets to keep absorbing supply disruptions. The fixes used so far can only stretch so far before new problems appear.
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More supply could come from a break inside OPEC, though not yet. The United Arab Emirates announced it would leave the group effective May 1, ending almost 60 years of membership. The country has more capacity than its old quota allowed, but the extra barrels were only expected once the war winds down.
Crude is also only part of the picture. Sawan has warned that shortages of diesel and gasoline were emerging after refiners shifted toward jet fuel when aviation fuel prices spiked. Shell’s own refineries were among those that made the switch, according to Investing.com.
What it means for oil prices and beyond
Drivers have already seen how quickly relief can fade. The national average for gasoline was back above $4 a gallon on August 12, even with shuttle tankers and pipeline workarounds helping crude get out of the region. Strait crossings remained in the single digits on some days during that stretch.
Wall Street is not betting on cheap oil soon either. Goldman Sachs expects Brent crude to trade between $80 and $90 a barrel until the conflict is settled. The pressure point in the energy system, analysts say, is now refining, not crude.
That is why Sawan’s message cuts both ways. The worst effects of the crisis may have been softened, he said, but that can only last so long. For investors and drivers alike, the recovery is real, and so is the risk that it stalls again.
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