A major military conflict between the U.S., Iran and other countries could cause a disruption of Middle East oil supply. It could be that the vast oil reserves held by the U.S. or China are crucial in controlling it. As the American military builds up in the region, there is still uncertainty in this long-running standoff. U.S. officials and Iranian officials continue to have indirect talks. The type of military action Washington may choose, and Tehran's possible response, remain open questions. The U.S. can choose from scenarios ranging from a targeted, limited strike to weeks of intense bombardment. Iran could choose a well-calculated and contained response, similar to the one it used in June last year when U.S. forces attacked its nuclear sites.

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 and deprive Tehran of vital revenue. It is likely that this is part of the reasons why the Strait was never fully blocked.

The U.S. Navy has also been well-prepared for any possible interference. This suggests that any disruption could be measured by hours or days, rather than weeks.

There are also alternative routes for exporting a portion (15 million bpd) of Gulf oil, such as pipelines in Saudi Arabia or the United Arab Emirates. This conflict could be more serious than any Iran has experienced in the past decades. Therefore, its previous actions may not be indicative of what it will do this time. A serious disruption of the supply chain is therefore a risk that cannot be ignored, particularly since the predicted glut on crude markets has not yet materialized. In?2026 the global oil market will enter a period of excess supply. There are multiple ways to deal with this problem, but the U.S., and China, are two of the most important.

SPR TO THE RESCUES

In the event of an oil supply shock, many countries, especially those that are heavily dependent on imports, may be able to 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.

This is not a major concern for the U.S. It is no longer reliant on imported oil, as the country produces around 13.6 millions bpd. Calculations show that the SPR?covers roughly 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 SUSPICIOUS STOCKPILING

China's crude buying behaviour will also play a major role in any scenario of supply disruption. China, with a consumption of around?17m bpd by 2025, is especially exposed to Middle East instabilities. 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 calculations by ROI, 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 alone in 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' worth of imports. Additional storage capacity may still be available.

China's commercial motives for stockpiling oil remain opaque. However, historically, crude purchases have slowed during periods when oil prices were relatively high. Beijing will likely'slow down its purchasing 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 exact outcome of the confrontation between Washington, D.C., and Tehran is unknown, but any escalation will likely push up oil prices, and a 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)