Two dominant forces balance the global oil market: supply and demand. The war with Iran has disrupted both of them – and one of them could be irreversibly affected.
Supply remains in a state of total chaos. An historic oil surplus has turned into the most severe supply shock in history, before a new wave of oil enters the market in June, writes CNN.
Now, amid the intensification of the war, access to a significant part of the oil in the Persian Gulf is once again restricted, bringing chaos back to the market.
Demand is, in a way, even harder to understand.
In the five months of war, the world has adapted to the supply shock, learning to operate with lower oil consumption than before the conflict. Last month, hundreds of millions of barrels of oil finally managed to cross the Strait of Hormuz, only to find that very few buyers were interested. Some of the Middle Eastern oil had to be sold at significant discounts to find buyers.
The reasons why the world seems to be turning its back on oil are complex. And the solution is even more complicated.
The collapse of demand
In the three short weeks that the Strait of Hormuz reopened (largely), something unexpected happened: over 200 million barrels of oil blocked in the Persian Gulf quickly entered the market, but buyers reacted with indifference.
Qatar Energy and the ADNOC company from the United Arab Emirates were forced to reduce the price of oil by between 6 and 9 dollars per barrel to find buyers in Southeast Asia, according to Homayoun Falakshahi, head of the oil market analysis department at Kpler, a company that monitors maritime traffic and oil flows.
Over 18 million barrels of non-Iranian oil that crossed the Strait of Hormuz are currently on tankers outside the Persian Gulf, still awaiting buyers - more than 2.5 times the levels before the war, Falakshahi said.
Iran had even less success than its neighbors in selling oil. In the weeks following the signing of the understanding memorandum with the United States, Iran managed to export 70 million barrels of oil through the strait. Despite a temporary suspension of American sanctions, China was the only buyer willing to purchase Iranian oil.
Thus, Iran directed the entire quantity to China, by far its largest customer before and during the war. However, China also showed little interest: last month, it drastically reduced its purchases of Iranian oil, from about 1.5 million barrels per day to just 630,000 barrels per day, according to Kpler.
Overall, global oil demand remains about 4 million barrels per day below pre-war levels, according to JPMorgan.
Mostly, this decrease in demand is explained by the inability to efficiently use the available oil. Refineries are already operating at maximum capacity, especially after Iran attacked 30 refineries in the Middle East during the war.
China's equation
Most explanations for the oil demand slump point to the same cause: China. China's reduced demand for global oil has exerted considerable pressure on global prices.
This is one of the main reasons why oil prices have never come close to the levels of 2022 or the record set in 2008, despite a much larger oil shock than in previous crises.
China relies almost entirely on oil imports. However, during the war, its oil imports have plummeted dramatically, dropping below 8 million barrels per day, from over 12 million before the conflict, according to Signal Ocean Research.
Some of the reduction in Chinese demand could be lasting. For example, demand for electric vehicles surged during the war, and the number of electric vehicles in circulation increased by a third. At the same time, Chinese authorities imposed strict restrictions on refineries, limiting the production of gasoline, diesel, and jet fuel.
However, the story of Chinese demand is more of exceptional preparedness than a renunciation of oil.
Before the war broke out, China built up significant oil reserves and has since primarily met its needs from these stocks, not imports. The country is depleting its reserves by about 2 million barrels per day, but still has around 1.9 billion barrels stored - enough for about 117 days of consumption, according to Julia Zhestkova Grigsby, senior commodity market strategist at Goldman Sachs.
For this reason, the "real" decrease in Chinese demand during the war is estimated at around 1.2 million barrels per day, not nearly the 5 million barrels per day represented by the import reduction, according to Signal Ocean Research.
When will demand recover?
At some point, China will need to rebuild its stocks. When it resumes massive oil imports, global demand could significantly increase, pushing prices up as well.
And the rest of the world will also need to replenish its reserves, especially the United States. The US Strategic Petroleum Reserve is at its lowest level since the Reagan administration began its formation in 1983. To counter the supply shock, the International Energy Agency decided to use a record volume of 400 million barrels from global strategic reserves, creating a significant supply gap that will need to be filled later.
It is not clear when this demand recovery will occur, and expert opinions vary considerably.
Goldman Sachs believes it could start soon, as Beijing has committed to maintaining substantial reserves. The International Energy Agency estimates that oil demand will decrease in 2026. OPEC believes it will increase. JPMorgan anticipates it will remain stable. Other industry experts acknowledge that measuring and predicting demand is extremely difficult.
"The situation regarding the Strait of Hormuz is so volatile that my outlook changes almost daily, with the flow of news," said Neil Atkinson, research associate at the National Center for Energy Analytics.
For potential buyers, it is difficult to determine if this is the right time to resume oil purchases. Oil tanker traffic through the strait has significantly decreased again, and prices continue to rise as the situation in the Middle East worsens. Brent crude temporarily surpassed the $90 per barrel mark on Monday, for the first time in over a month.
The oscillating nature of the conflict - with periods of escalation and relative calm - could further delay the recovery of oil demand.
"For demand to recover, I think buyers need to see a significant resolution between the United States and Iran that provides confidence it will be lasting," said Kieran Tompkins, senior commodities economist at Capital Economics.
Until then, countries seem comfortable consuming their own reserves. At least as long as they last.