The physical oil market is in the eye of the storm – a deceptive calm after the initial scramble to cope with the biggest oil crisis in history. The blow from the Iran war has been cushioned so far by a dramatic pullback in China’s purchases and a surge in US exports.
But with the peak demand season looming, this delicate balance may not hold for long. The crude market is surprisingly calm despite the abrupt loss of almost 20 million barrels per day of Middle Eastern oil, or roughly a fifth of global supply, following Iran’s closure of the Strait of Hormuz shortly after the start of joint US-Israeli airstrikes on February 28.
That is because much of the world is still securing adequate supplies through a complex, fragile adjustment. The US and other Atlantic Basin producers have ramped up exports, plugging a significant portion of the Middle Eastern supply gap.
At the same time, China has deliberately cut back purchases and countries around the globe have drawn down inventories at an extraordinary pace. That unexpected availability has eased pressure on prices. Physical Brent crude is trading near $110 a barrel, well below its crisis peak.
But this balancing act is unsustainable.
With the Hormuz closure likely to extend for at least several more weeks amid sputtering peace efforts, the oil market is poised to enter a new and potentially more dangerous phase.
Supply scramble
The initial response to the Middle Eastern supply crunch in the hardest-hit regions was to slash consumption. Asia, which until February sourced about 60 per cent of its oil from the Persian Gulf, bore the brunt. Refiners shut down units, governments rolled out energy-saving measures and released emergency reserves at scale.
Asian crude imports in April fell to just 18.7 million bpd, down sharply from an average of around 25 million bpd in 2025, according to Kpler shipping data. At the same time, refiners scrambled to source alternative feedstock from far afield, turning primarily to the US and Latin America.
That shift has fundamentally reshaped global trade flows. US seaborne oil exports surged to a record 8.55 million bpd in April and are set to climb above 10 million bpd in May, according to Kpler, cementing America’s role as the world’s largest oil and gas producer.
This wave of emergency buying drove a sharp spike in physical oil prices throughout March and April. Crude from the Atlantic Basin hit a record high of nearly $150 a barrel as refiners competed for limited supplies.
The long distances involved in shipping oil from these regions to Asia created a lag of four to eight weeks between purchase and delivery, meaning replacement barrels are just now arriving.
This, and the dramatic drawdown in global crude inventories, helps explain why prices in the physical market have fallen significantly in recent weeks.
China factor
Another key actor that has helped ease the global scramble is China. The world’s largest oil importer sharply reduced crude buying after the Iran war broke out. From near-record seaborne imports of 11.5 million bpd in February, shipments fell to eight million bpd in April and are set to drop further to just 6.9 million bpd in May, the lowest level in nearly a decade, according to Kpler.
Chinese refiners have largely stayed on the sidelines in May, turning down crude offered by Saudi Arabia and even reselling West African refined products.
That behaviour suggests China’s oil imports will remain depressed well into the summer months.
Beijing was arguably destined to play a pivotal role in the global response to the crisis because of its vast oil stockpiles, estimated in February at around 1.3 billion barrels, roughly the equivalent of four months of imports.
China does not publish detailed data on its oil inventories, making it difficult to assess how aggressively it has tapped its reserves.
However, the International Energy Agency said China’s above-ground crude stocks fell by seven million barrels in March, the first decline in six months. The Paris-based agency has no visibility on oil held in underground caverns.
When excluding China, Asian imports are set to surge by 27 per cent between April and May to around 14 million bpd, highlighting China’s unique position. US exports to the region are expected to nearly double, rising from 1.1 million bpd in April to about two million bpd in May, according to Kpler.
Danger zone
Today’s relative calm should not be mistaken for a new equilibrium. As the Hormuz crisis is set to enter its 12th week, most of the world’s oil stockpiles are depleting rapidly.
Observed global inventories, including oil stored on tankers, have fallen by 246 million barrels since the start of the war, equivalent to about four million bpd, according to the IEA.
Meanwhile, refiners will soon seek to ramp up supplies ahead of the crucial Northern Hemisphere summer demand season, when fuel consumption typically peaks.
The US export surge may face political hurdles. Rising summer domestic demand and shrinking US inventories could push up gasoline prices sharply.
While the Trump administration has rejected any claims that oil export restrictions are in the cards, that could change if American consumers truly start to feel the pinch.
Overall, the market’s response to the Hormuz shock – from shipping and storage to trading and finance – is a testament to the flexibility and depth of the global oil system. But the shock absorbers are thinning with each passing day that Hormuz remains obstructed.
As summer begins, the economic impact of the conflict is likely to become more visible – and far more painful.
(Reporting by Ron Bousso; Editing by Marguerita Choy)
