Global oil markets are losing 100 million barrels every week the Strait of Hormuz is shut, compounding a supply shortage that has already made the Middle East war the most significant supply disruption ever, according to the head of Saudi Arabia’s state oil producer.
That shortfall in supply is being met by companies and governments dipping into storage, with global stockpiles running dangerously low, Saudi Aramco Chief Executive Officer Amin Nasser said on a conference call with analysts. Most of the world’s spare oil production capacity is located in the Persian Gulf, meaning it’s not available to help address the shortfall, he said.
Nasser’s assessment, roughly in line with that of investment bank analysts, highlights the deepening risk that surging energy prices could drag down global growth, as the conflict in the Middle East stretches into its third month.
“The longer the supply disruptions continue, even for another few more weeks, it is going to take much longer for oil market to rebalance and stabilize,” Nasser said. “It could drag on into 2027 to return to normal levels.”
With no resolution of the Iranian or US blockades around the strait in sight, oil jumped and traded above $100 a barrel on Monday. That’s still off the highs seen earlier in the war. The ability to draw down inventories has masked how tight the global market actually is, Nasser said, adding that he sees a disconnect between prices at which oil is trading in futures markets compared with physical barrels.
A lack of investment in production outside of the Middle East has left markets poorly prepared for such a supply shock, Nasser said. The supply shortfall will become even more apparent in May and June, and, if the crisis continues, rebalancing oil markets will take into next year, he cautioned.
Even when Hormuz reopens, it will take time for oil tankers to move to the proper locations to pick up cargoes and for producers to ramp up output, extending the time it takes for the market to recover, Nasser said. While some Gulf producers that shut in wells could need three to six months to bring back all of their output, Aramco could do so in much less time, he said.
“Our maximum capacity is intact and we can bring it on, if called upon by the government, depending on the quota in less than three weeks,” Nasser said. Aramco maintains a maximum sustained capacity of 12 million barrels a day and had been pumping about 10 million barrels daily before the war cut that to about 7.4 million in March and April, according to data compiled by Bloomberg.
Beating Expectations
Higher prices of crude and refined products helped Aramco report a 26% increase in first-quarter adjusted net income of 126 billion riyals ($33.6 billion), beating analysts’ expectations. The company produced 10.6 million barrels of crude and fuels per day in the quarter, compared with 10.3 million barrels daily in the year-ago period.
Within eight days of the war starting, Aramco had redirected the bulk of its crude production from its eastern fields via a pipeline to the Red Sea port of Yanbu, reaching the maximum 7 million barrel-a-day rate of flow, Nasser said. Bypassing Hormuz allowed Aramco to sell as much about 70% the volumes that would have normally exited through the Persian Gulf and the company is working to expand the export capacity at Yanbu beyond the current 5 million barrels a day.
Tanker-tracking data compiled by Bloomberg show observable exports in March were about 3.6 million barrels a day on average, rising to just short of 4 million a day in April.
Maximizing Margins
The pipeline also serves Aramco’s refineries on the west coast, where the company has ramped up output of products like jet fuel and diesel at the expense of crude exports, Nasser said.
“We are maximizing products at this stage because of the higher margins,” he said. Facilities that had been damaged by attacks, including the Ras Tanura refinery, were largely back to normal operations, he added.
Aramco is set to shut some units at the Ras Tanura refinery, the largest in the country, for scheduled maintenance, and a joint venture refinery with TotalEnergies SE at Jubail is also running below capacity after suffering damage, he said.
Written by: Anthony Di Paola @Bloomberg
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