Before the war, 40 tankers carrying 20 million barrels of crude oil and refined petroleum products traversed the Strait of Hormuz every day. This week Iran has allowed just a handful of tankers to slip through Hormuz, including ships flagged to India and China. Amid oil rationing and shortages, which countries are most in danger of winning the race to empty?
This week analyst Mike Haigh and his team of commodities market analysts at Societe Generale figure that for now the trickle through the Strait will average 500,000 barrels per day, on Iran’s whim.
Incredibly, much of the rest of the pent-up oil is still getting to market, or at least filling up storage tanks. The Saudis have turned to their long-planned and expanded East-West pipeline, which will be pushed to its limits in carrying 7 million barrels per day to the Red Sea port at Yanbu. Likewise, the United Arab Emirates has been able to move some oil east around the Strait via pipeline to the port of Fujairah, though Iran has reportedly attacked that infrastructure.
Analysts at Jefferies see 6.7 million barrels per day of Gulf oil production now shut-in. Energy Aspects figures that the Hormuz-related outages will peak at 10 million bpd, with total OPEC crude oil production now down 7 million bpd to 22.3 million. That’s 7% of the world’s daily crude oil diet of 100 million barrels per day.
The United States, as the world’s biggest oil and natural gas producer, is somewhat insulated from supply shocks. Prices for gasoline and diesel may surge here, but there is little chance of outright shortages.
Other countries don’t have that comfort. Myanmar, Vietnam and thePhilippines, according to the SocGen commodities team, source upwards of 80% of their oil via cargoes that pass through Hormuz, and only have about a month of oil in storage before they’ll run out — or need to find alternate supplies.
The situation is also acute in Singapore, which usually receives 680,000 bpd of trans-Hormuz crude oil and has just 40 days of inventory “cover.” Thailand is in only a little better position, with 50 days of cover on its 400,000 bpd from Hormuz.
Taiwan, which imports 525,000 bpd, can last about 100 days. Bangladesh too can last about 100 days, and has already instituted fuel rationing and shuttered fertilizer plants. It doesn’t import much crude, but all of it usually passes through Hormuz.
Bigger countries tend to have more options. South Korea imports about 3 million bpd, with 2 million of that coming via Hormuz. Its inventories can cover 50 days of no imports or about 70 days just making up for Hormuz shipments. That’s about the same as India which has a 175 million-barrel strategic petroleum reserve to balance 5 million bpd of total needs, 45% of which comes via Hormuz. Indonesia has sufficient resources to withstand a Hormuz closure for 160 days. Japan, with large strategic reserves, can get by for 200 or so days without shipments via Hormuz.
Perhaps surprisingly, China can withstand 300 days of no oil shipments from Hormuz and more than 100 days of no exports at all, thanks to its 1.3 billion barrel strategic petroleum reserve--despite the fact that 45% of China’s more than 11 million bpd of total oil imports pass through the strait. “China has intentionally capped Middle Eastern dependence near 50% and built substantial shock absorbers through diversified oil sourcing, pipeline gas, domestic production, and large inventories,” says analyst Lloyd Byrne at Jefferies.
How will all these countries make ends meet? The International Energy Agency intends to help them on the margins by releasing 400 million barrels over the next few months, but that alone won’t fill the gap, and only pushes demand out into the future (because reserves need to be refilled).
Reducing demand helps somewhat. Vietnam has ordered people to work from home. In Thailand civil servants are ordered to take the stairs. In Sri Lanka the government instituted a four-day work week.
A better option is to diversify energy sources. South Korea has decided to pause on its phase out of coal-fired power plants and ramp up its nuclear reactors to help make ends meet.
China too has ample capacity to ramp up coal burning. According to Bernstein Research China’s coal plants are operating at just half of their potential. What’s more China has been building so much wind and solar power that this year it will add about 500 terawatthours of new renewable generation. That’s an important tipping point because it means China is adding more renewable power than the entirety of its electricity demand growth — helpful for offsetting missing oil and LNG from Hormuz.
Time will bring relief. Energy Aspects consultancy believes that even if Hormuz is closed to U.S.-affiliated tankers, Iran will likely be back to exporting 3 million barrels per day by the end of the year. And within 18 months expect Venezuela to ramp up by 1 million barrels to about 1.3 million bpd.
In the U.S. meanwhile, oil drillers have begun to reactivate mothballed drilling rigs, adding back two last week to bring the operating total to 553. That’s still 39 rigs below this time last year. Expect America’s drillers, currently pumping a record 13.6 million barrels per day, to boost that towards 14 million by the end of the year.
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