A major military conflict between the U.S., Iran and other Middle Eastern countries could cause a disruption of oil supplies in the region. It could be that the vast oil reserves held by both the U.S.A. and China are crucial in controlling it. As of now, the protracted standoff is characterized by uncertainty, as U.S. officials and Iranian officials continue to hold indirect discussions, while American military forces are amassing in the region. The exact nature of Washington's military response, as well as Tehran's possible reaction, remain unclear. The U.S. can choose from a targeted, limited strike or weeks of intense bombardment. Iran could opt for a carefully calibrated and contained response similar to the well-telegraphed reactions to U.S. attacks on its nuclear sites in June's 12-day Israel-Iran conflict.

Iran's leadership may decide to "set fire to the region" if they feel that their regime is under threat. This extreme scenario would include attacks on Israel, other U.S. ally countries in the region including Saudi Arabia and strikes on oil and natural gas fields. It could also involve the doomsday situation - the blocking of the Strait of Hormuz. This narrow shipping lane, which connects Iran with Oman, transports around 20 million barrels of crude oil and refined products per day - almost a fifth the global consumption. If Iran disrupted transit through Hormuz it would also stop its own oil exports. This would rob Tehran of vital revenue. It is possible that this is part of the reasons why the Strait was never completely blocked.

The U.S. Navy, meanwhile, is prepared to deal with any possible interference. Any disruptions would be likely measured in days or hours rather than weeks.

There are also alternative routes to export a portion (15 million bpd) of the oil from the Gulf, such as pipelines in Saudi Arabia or the United Arab Emirates. This conflict could be more severe than any Iran has experienced in the past decade, so its previous actions might not be indicative of what it will do this time. It is therefore impossible to discount the risk of a major supply disruption, particularly since the predicted supply glut on crude markets has not yet materialized. In 2026 the global oil market will enter a period of excess supply. There are many options to deal with this problem. The U.S., and China, are two of the most important.

SPR TO THE RESCUE

In the event of an oil supply shock, many countries, especially those that are heavily dependent on imports, could tap their strategic reserves. The International Energy Agency (IEA), which is a member of the United Nations, requires that its members hold 90 days' worth of net crude oil imports and refined products as strategic reserves. The last time IEA members released oil from their reserves was in early 2022, following Russia's invasion of Ukraine. This included the largest ever withdrawal from the U.S. Strategic Petroleum Reserve, of approximately 1 million bpd in six months. U.S. SPR has a capacity of 714,000,000 barrels, making it the largest emergency oil reserve in the world. Washington slowly rebuilt its inventories from mid-2023 onwards, but stocks were still at 415 million barrels in mid-February. This is well below the capacity of the U.S. Energy Information Administration.

It isn't a major concern for the U.S. It is no longer reliant upon imports as it was in the past. Calculations show that the SPR covers approximately 200 days worth of net crude imports. This is well above historic norms. Washington has a large buffer to use in the event that a supply shock occurs, which U.S. president Donald Trump may choose to do so as a way of dampening oil prices.

CHINA'S SECRET STOCKPILING

China's crude buying behaviour will also play a major role in any scenario of supply disruption. China, which is expected to consume around 17 million barrels per day in 2025, will be particularly affected by Middle East instability. According to Kpler, the Middle East accounted for about half of China's crude imports of 10.4 million barrels per day last year. According to ROI calculations, China has also absorbed a significant share of the global surplus supply over the past few years. It is estimated that 800,000 barrels per day will be added to storage by 2025. China does not release official data about crude inventories. Analysts estimate that stocks could reach 1.3 billion barrels, which is more than four months of imports. Additional storage capacity may still be available.

China's commercial motives for stockpiling oil remain opaque. However, historically, crude purchases have slowed down during periods of high oil prices. Beijing will likely slow its purchases in the event of an abrupt price spike. This will ease pressure on global supply. China may also decide to release some inventory to ease pressure on its domestic refineries. The SPR was released in only one official release, 2022, but the volume was small.

The outcome of the confrontation between Washington, D.C., and Tehran is not known, but any escalation will likely push up oil prices. A severe disruption in Middle East oil supplies could cause one of the worst energy crises for decades.

The U.S., and China are the two world's largest oil consumers. They hold the key to managing a major shock.

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(source: Reuters)