The largest oil supply shock since decades is now in its fourth month. There's no end in sight, as neither the U.S. or Iran seem willing to compromise. Yet the market has settled into a eerie calm. This disconnect is a reflection of an uncomfortable truth: The biggest drivers in today's energy markets are unknowns.

Brent crude, the benchmark, has fallen from its four-year high, $118 per barrel, reached in March to below $95. This is a return to the levels of the last two decades. The Strait of Hormuz, the world's main oil chokepoint, has been largely closed for over three months. This has disrupted flows equal to 13% of the global supply.

The market's optimism is largely due to the expectation that the Gulf conditions could drastically change over night. The repeated claims by Donald Trump in recent weeks about a possible deal with Iran have helped to cool the market. There is still little sign that Washington and Tehran have made any progress towards a lasting agreement. Both sides continue to hit targets in the region.

Even if the formal reopening occurred in the next few days - which is not the most likely scenario - it would not immediately translate into a complete recovery of flow. Geopolitics and risk assessments are both important factors in shipping. The fear of stranded vessels in the Gulf is likely to keep tanker operators, traders, and insurers from reentering. There are signs that there have been more cargoes leaving the Gulf using stealth channels in the last few weeks. However, this is a short-term solution being used by desperate operators and not a strategy for long-term success.

This opacity also speaks to a larger problem. Most oil traders operate in the dark regarding supply and demand. This increases the risk of a nasty surprise if their assumptions are incorrect. How long can stocks last? First, it is not known how long global stocks can last. Since the outbreak of conflict on February 28, governments and companies have used commercial stocks and strategic reserve at an unprecedented rate.

According to the U.S. Energy Information Administration, global crude and fuel inventories fell by?5,27 million barrels a day in March. This increased to?8,62 million bpd during April, and is likely to reach 9 million bpd or more in May. The drawdown could increase to 11 million barrels per day in June, as the seasonal demand rises ahead of summer in the Northern Hemisphere.

This is an extraordinary number - it's like Saudi Arabia losing its pre-war production every day. The United States is a good example. The United States is a stark example.

Cushing, Oklahoma, is the delivery point for West Texas Intermediate futures. Stocks have fallen to the lowest level since January. If the current average rate of?draws continues, inventories may soon drop below 20 million barrels. This is widely considered the minimum threshold for the hub to function smoothly.

Storage systems are not infallible, but the market has shown itself to be remarkably flexible over the past few months. Prices are expected to rise as the "tank bottoms", or levels of scarcity, approach. THE CHINESE ENIGMA

China is another key unknown. China, the world's second largest oil consumer, has reduced its seaborne crude exports as a result of higher prices. Imports fell in May to 6,36 million bpd - their lowest level in almost a decade.

This decline has been a relief for other importers, as it has lowered the competition to secure scarce cargoes. It has, however, introduced a new level of uncertainty.

China may decide to return to the market at any time.

China doesn't publish comprehensive or timely consumption data. This leaves the market in the dark as to how much the demand has been affected.

Beijing could have started to use its massive, but unidentified strategic reserves to compensate for lower imports.

If this is the case, then global supply may be tightening even more than what traders are currently estimating. If not, the drop in imports may signal a sharper-than-expected slowdown in demand.

This lack of clarity about a key driver of global supply and demand at such a "precarious" moment is troubling, as it could lead to some people being on the wrong end of a trade. The invisible balancing force

The problem of measuring China is a sign of a larger issue: the demand for goods and services in China is harder to gauge than the supply.

The industry has developed sophisticated tools that track crude production, refinery activity and tanker movement - in many cases near real-time - but consumption is still fragmented among billions of consumers and often reported with considerable delays. Some countries, like China, do not report it at all.

Estimating the amount of destruction in demand caused by the current shock in supply has therefore become a matter of inference.

The mechanism in theory is simple: as the supply tightens, inventories are depleted, prices rise, and demand slowly disappears. In reality, this process is messy, uneven, and difficult to monitor in real-time.

Last month, the International Energy Agency radically revised its global demand forecast, projecting a contraction of 420,000 bpd by 2026. This is compared to a prewar expectation for growth of 1.3 millions bpd. The consumption is expected to drop by 2.45 millions bpd just in the second quarter.

Some analysts and traders are more pessimistic, estimating the demand may have decreased by up to 5 million bpd in May.

The longer the disruption of the Hormuz continues, the more it will affect the economy and fuel demand.

Oil market appears to be remarkably relaxed today, despite a long-term and unprecedented disruption.

It could be that people are tired after months of volatility. But it may also reflect how little everyone knows about the real state of the oil markets, including experts. And how much of pricing is based upon sentiment and expectations.

This is a very precarious basis.

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(source: Reuters)