How we dodged the oil-pocalypse

With the US and Iran again trading fire over the weekend then hitting pause before markets re-open, this could be the world's first war to follow Roxbury opening hours.

But while these talks limp on and oil stabilises closer to its ~$70 pre-war levels, it's worth reflecting on how our world has (to date?) avoided a $200 per barrel doomsday.

Brief recap, but oil math is mercifully simple: global output runs around 100 million barrels per day (mbd), with 20mbd (20%) via Hormuz. And for something price-inelastic like oil (we need it, cheap or not), there’s a rule-of-thumb that each 1% in lost supply drives a ~6% spike in prices. So a 20% hit to supply should've spiked prices 120% past $150 or more.

Our own warnings weren't quite so dire — we flagged back on March 11 that a longer war could mean "oil prices staying higher ($100+) for longer (at least into Q3)." And in the end, prices peaked twice around $125, but otherwise bounced between $80 and $110.

So what's going on? It turns out four main supply and demand offsets blunted the headline 20mbd threat, starting with...

1. Hormuz supply resilience — ~6mbd

Yes, a bunch of that Hormuz oil found a way around the chokepoint: the Saudis rammed an extra 2mbd through their pipeline over to the Red Sea, while the Emiratis diverted an extra 0.5mbd through their pipeline out near Oman.

Other Hormuz oil just leaked through the cracks: the Iranians themselves used shadow fleets, ship-to-ship transfers, and steep discounts to export more oil during the war than before — that's an extra 1mbd or so pre-blockade.

Plus the US itself approved, orchestrated, or tolerated leakages, particularly along the safer Omani coast, with those volumes averaging maybe another 2mbd.

So that's ~6mbd that, one way or another, just kept flowing. But it all still left a gap, so...

2. IEA supply buffer — ~2.5mbd

Responding to history’s biggest supply shock, the Paris-based International Energy Agency (IEA) coordinated its largest-ever emergency reserve release, with its 32 members pouring another 400 million barrels out into markets.

That’s translated into another ~2.5mbd averaged across the phased drawdown, even as it dragged US strategic reserves to their lowest levels since the big 80s-era fill-up.

And yet while supply proved surprisingly resilient, we also got surprises via...

3. China’s demand drawdown — ~5mbd

Remarkably, China's crude imports almost halved from nearly 12mbd in February to almost ~6mbd in May. What caused that historic drop?

We don't officially know — China effectively treats its oil as a state secret, partly to avoid rivals mapping and manipulating any vulnerabilities. But via satellite imagery, import-export discrepancies, refinery throughput, and insider leaks, you can safely conclude China was sitting on a billion+ barrels — that's enough to cover imports for 90 days.

So via a mix of both halting its stockpiling and allowing its refiners to tap those stockpiles, the world's largest oil importer abruptly stepped back from global markets, sharply reducing bidding pressure on everyone else.

But as big as China's pullback was, it wasn't alone...

4. Broader demand destruction — ~2.5mbd

Remember all those wild headlines we charted over the months? Bangkok bureaucrats wearing short-sleeves to cut A/C costs; Bengaluru tech workers bringing lunch from home amid a cafeteria energy crunch; Manila's mandarins working from home to reduce commute costs; airlines slashing their lower-margin routes; Asia's refineries winding back.

These scattered shifts collectively trimmed maybe another 2-3mbd at the margins.

So when you tally up that 6mbd in supply resilience, 2.5mbd in IEA buffer, 5mbd in China’s pullback, and 2.5mbd in broader demand destruction, that’s maybe 16mbd out of the feared 20mbd shortfall already offset.

Throw in the way the White House's relentless jaw-boning ("the war is over… again!") dissuaded speculators from piling in, and that smaller ~4mbd net imbalance explains why we “only” saw prices spike from ~$70 pre-war to a ~$105 wartime average.

So plenty of time and cash left to hit the Roxbury again next weekend.

Sound even smarter:

• Several governments (like India) are now actively hustling to expand their strategic reserves for next time.

• The Hormuz crunch accelerated consumer interest in EVs, but EVs themselves still make up only ~5% of the global car fleet. Even in (say) Norway, it’s ~28%.