Hormuz Recovery to Take 4 Months to Hit 80% Pre-War Flow

(P1) A full recovery of oil flows through the Strait of Hormuz will take at least four months to reach just 80% of pre-war levels, according to RBC Capital Markets, prolonging a supply shock that has sent Brent crude up 80% this year to around $110 a barrel.

(P2) "The market is underestimating the time required to bring these barrels back online," Helima Croft, Global Head of Commodity Strategy at RBC, said on May 20. "Even with a diplomatic resolution tomorrow, the technical and logistical hurdles are immense."

(P3) The supply disruption stems from the effective closure of the strait since late February amid the conflict in Iran, which has slashed Middle East oil production by over 50%. Iraq’s output alone has collapsed from 4.9 million barrels per day to just 1.6 million. The total supply loss of more than 10 million barrels per day far outstrips a 420,000 barrel-per-day drop in demand the International Energy Agency has forecast due to surging prices.

(P4) The prolonged outage threatens to keep inflation stubbornly high, forcing central banks to delay expected rate cuts. With over 500 million barrels of cumulative supply already lost and strategic reserves being drawn down, the timeline for normalizing global inventories now stretches well into 2027, suggesting little relief for consumers and industries grappling with high energy costs.

Recovery Hampered by Technical and Inventory Hurdles

The path to restoring the more than 10 million barrels per day of lost production is complicated by two major factors: restarting shuttered oil wells and replenishing depleted global inventories.

Energy consultancy Woods Mackenzie estimates it will take some of Iraq's southern oil fields nine months to return to just 85% of their pre-war output. Wells that were shut in as storage terminals reached capacity cannot be instantly restarted, creating a significant lag even after the strait reopens.

Furthermore, the need to rebuild emergency stockpiles will create a source of demand that competes with consumption. IEA member countries are releasing 400 million barrels from their emergency reserves, all of which will need to be repurchased from the market once the supply situation stabilizes. Goldman Sachs' base case assumes Persian Gulf exports normalize by the end of June, forecasting Brent will still average $90 a barrel in the fourth quarter.

Oil Shock Ripples Across Global Markets

The energy crisis is a key factor behind a brutal sell-off in global bond markets and sliding equity prices. The U.S. 30-year Treasury yield recently hit 5.183%, its highest level since 2007, as investors price in stickier inflation. The S&P 500 and Nasdaq have fallen for three consecutive sessions against a backdrop of "soaring yields, high oil prices and an increasingly hawkish outlook for global interest rates," as noted in live market commentary.

The pressure is global. In Australia, the Reserve Bank's Assistant Governor Sarah Hunter warned that successive inflation shocks, driven by fuel costs, risk de-anchoring public expectations. This could force the RBA into a sharper economic slowdown than previously anticipated.

Despite the clear bullish case for oil prices, energy stocks have seen only modest gains. Shares of Exxon and Chevron are up only 25-30% this year, suggesting they may have further to run as they generate massive cash flows at sustained higher prices.

This article is for informational purposes only and does not constitute investment advice.