According to analysis firm Kpler, the world has lost 1.15 billion barrels of oil supply during the conflict.
This week, after the US and Iran announced that they had signed a memorandum of understanding towards a roadmap to end the conflict, the world received good news that the Strait of Hormuz had reopened.
However, the bad news is that this may have come too late!
A massive amount of oil has been unable to leave the Middle East for nearly four months. According to Kpler, the world has lost 1.15 billion barrels of oil supply during the conflict.
This has left the oil market in a precarious state, rapidly nearing a breaking point. The strategic petroleum reserves of the International Energy Agency are at their lowest since 1990. US emergency reserves are at a 43-year low. Commercial inventories have hit operational stress levels.
President Donald Trump said at the G7 in Versailles on Wednesday: "We will run out of reserves in about four weeks."
And he is right. But reopening the Strait of Hormuz this week may not allow oil to leave the Persian Gulf fast enough to prevent crude oil inventories from actually running dry.
Oil prices may need to rise again.
The tipping point
The oil market certainly believes the timing is perfect. As Trump predicted, oil prices have fallen sharply in recent days as the memorandum with Iran took shape and took effect.
Brent crude began to fall after the ceasefire announcement in mid-April, from a peak of $126.41 to below $80 per barrel now.
Behind the decline in oil prices is the historic oversupply of crude oil before the conflict erupted, which helped the world have a cushion against the biggest supply shock ever. But that oversupply has evaporated and quickly turned into a worrying deficit.
Global oil inventories have fallen sharply by 190 million barrels in recent months. A key oil hub in Cushing, Oklahoma, which pipes fuel across the US, has just hit operational stress levels. This is like when the coffee in the pot is below the spout, and you have to tilt the pot to get the last dregs into the cup. Most of what settles at the bottom of oil tanks is unusable sludge, making it difficult to maintain pipeline pressure to get oil to customers.
This is not just happening in Cushing. Storage facilities around the world are also approaching critical points.
"There will come a time when you cannot get it, that is, oil," Trump said on Wednesday, warning of an "economic disaster" looming if the strait was not reopened. He said it would lead to comparisons with Herbert Hoover, the former president who oversaw the onset of the Great Depression.
Higher prices
Reopening the Strait of Hormuz will not immediately solve the world's inventory problem. It only starts the process of returning oil flows to normal.
The strait will need to be swept for mines, empty tankers will have to start returning to the area, production must restart, and oil will have to begin its slow journey to its destination. None of that happens quickly. It is a process that the oil industry believes could take months before oil flows return to near "normal."
Until the oil market truly returns to a near-normal state, the system will continue to rely on those inventories.
That is why some industry analysts believe oil prices have fallen too far, and the market is underestimating the risk of actually running out of oil before tanks can be refilled.
"The market has jumped seven steps ahead of where we are," said Helima Croft, head of global commodity strategy at RBC Capital Markets. "Everyone is like, 'This is over!' But there is a huge logistical challenge to get back to where we were."
When the euphoria over the strait reopening subsides, the fundamental factors of the market will eventually prevail, pushing oil prices back up.
"Regardless of what happens in the coming weeks at the Strait of Hormuz, US consumers will still face higher prices in the summer months," said Matt Smith of Kpler. "That hasn't happened that way because of optimism about a deal. But market forces will have to come into play here."
The math is clear: Even if the global oil market starts producing supply exceeding customer demand by nearly 5 million barrels per day, as the International Energy Agency forecasts, it would take about a year to make up for the lost 1.15 billion barrels of supply.
"At some point, those physical barrels really matter," said Dan Pickering. "If you lose those barrels, it matters."
Lower prices
But the market is not always rational.
Traders see a large flow of oil set to return to the market, especially from OPEC members who are cash-strapped and eager to increase output. That new reality will make it very difficult to reverse the momentum of the oil market, argued Jay Hatfield, CEO of Infrastructure Capital Advisors.
And perspective also matters: The world was so flooded with oil before the conflict erupted that we were somewhat insulated from the massive inventory drawdown.
"We had a big cushion, and we have eroded that cushion," said Vikas Dwivedi, global oil and gas strategist at Macquarie Group. "We have lower oil levels than last year, but not by too much."
For example, US diesel inventories are at their lowest since 2003, but only 12.4% below the five-year average. US gasoline inventories are only 5% lower than a year earlier.
Inventory risk is real, but according to Dwivedi, the bulls are placing too much weight on the issue.
"If you are an oil trader at a refinery, and your job is to get oil, in a crisis you have to make 10 calls to get oil. Now you have to make 5-6 calls," Dwivedi said. "In the coming weeks, sellers will actively come to you and say, 'Hey, I have oil, do you want to buy it?'"
