Crude: Severe supply disruption meets rising demand destruction as Hormuz closure persists

Key points:

• Oil prices continue to whipsaw as traders respond to a confusing and often contradictory flow of headlines, underscoring the deep mistrust between Tehran and Washington.
• With the Strait of Hormuz effectively closed, the market faces a continued, severe, and potentially growing disruption to flows.
• Demand destruction (~5 mb/d), combined with China’s stock drawdowns and re-selling of barrels, has masked supply losses and limited crude price upside for now.
• Any reopening will be gradual: logistical bottlenecks, refinery damage, and upstream delays are set to keep refined markets tight and support a higher crude price floor

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Oil prices continue to whipsaw, but with Brent holding below USD 100 after Trump extended the ceasefire with Iran, even as peace talks remain on hold due to Tehran’s refusal to negotiate while the US maintains its naval blockade, which may force Tehran to curb production within 15 days according to JPM. The result is a continued and severe, and potentially growing, disruption to flows, with the Strait of Hormuz effectively closed.

The latest sequence of developments where claims are met with counterclaims or accusations of being false underlines the deep lack of trust between the two warring sides, and it has left the market guessing - which is never a good thing - about what may happen next. Overall, it confirms that headline-driven optimism can reverse quickly when not backed by enforcement on the ground.

Part of the market’s resilience during the disruption can be traced to softer demand, particularly across Asia. According to Vitol, higher oil and fuel prices have already triggered around 5 million b/d of demand destruction. China - the world’s largest crude importer - has further amplified this effect by reducing seaborne purchases, actively reselling barrels, and drawing on substantial strategic and commercial inventories estimated at around 1–1.2 billion barrels. Together, these factors have helped offset the immediate need for imports, thereby containing the price response despite severely restricted flows. However, such support is likely temporary and reversible. Market stress, meanwhile, remains evident in refined products, where shortages of diesel, jet fuel, and petrochemical feedstocks continue to underpin prices.

The key question now is what happens next, assuming a more durable reopening can eventually be achieved.

Even in a scenario where the Strait remains open, the process of restoring normal flows is unlikely to be smooth. Tankers are out of position, supply chains dislocated, and the task of re-aligning vessels with loading and discharge points may create a logistical bottleneck in the weeks ahead. A reopening in principle does not translate into an immediate recovery in effective supply.

With more than 500 million barrels of lost production potentially rising towards 1 billion, even a full normalisation which is likely months away, would still leave the market in a much tighter situation than before, potentially lifting the price floor in crude oil by around 10-15 dollars compared to what it was before the war started. In the meantime, current tightness - especially in refined products - is expected to persist. This reflects not only disrupted crude flows but also the uncertain state of refinery infrastructure across the Persian Gulf, where damage assessments are only now beginning to emerge.

With jet fuel prices more than doubling since the war began, the market continues to tighten, forcing airlines globally to cancel flights or raise fares. Lufthansa, for example, plans to cancel around 20,000 flights between May and October - equivalent to roughly 40,000 metric tons of jet fuel - saving about USD 60 million at current prices. Further highlighting the strain, European transport ministers met this week to discuss contingency plans after the International Energy Agency warned Europe has less than six weeks of jet fuel supplies remaining.

Following an eventual reopening of the Strait, upstream constraints add further delays. Production cannot resume at scale until storage tanks are sufficiently drawn down. Only then can wells begin to reopen - an operational process that may take weeks or longer depending on field conditions and infrastructure damage.

On the political side, Iran’s formal structure remains centred on the Supreme Leader, who holds ultimate authority over the armed forces. However, recent developments suggest hardline elements within the Islamic Revolutionary Guard Corps (IRGC) are increasingly shaping operational outcomes, particularly in strategic areas such as Hormuz. This raises questions about who ultimately controls decisions and who can credibly negotiate with Washington.

For negotiations, this creates a structural challenge: external counterparts may engage with officials able to shape a deal, but implementation depends on alignment with the Supreme Leader’s circle and, critically, the IRGC. If hardliners choose to maintain pressure, diplomatic agreements risk being diluted, delayed, or only partially enforced in practice.

Conclusion:

While the underlying physical market remains constrained, near-term price action is driven by attempts to gauge the true extent of disruption, with demand destruction, sentiment and positioning playing a key role. Demand softness has temporarily masked the severity of supply losses, but this is unlikely to persist. Logistical delays, refinery disruptions and a slow upstream recovery point to continued tightness in refined products, leaving a risk of renewed upside pressure the longer a peace deal remains elusive.