THE ECONOMIST: Oil markets are floating in eye of the storm but prices could soon rise convulsively

The largest supply shock in petroleum history is getting larger fast.

Some two billion barrels, or 5 per cent of the world’s yearly oil supply, have already been lost because the Strait of Hormuz is shut.

Every day it remains closed the deficit grows by 14 million barrels. Since peace talks between America and Iran have stalled, a reopening still seems many days away.

Yet oil markets look strangely calm. Brent crude futures, at $105 a barrel, have fallen from April highs of nearly $120.

They remain below the peak of $129 in 2022, after Russia invaded Ukraine. Spot prices have slid even more, implying that crude oil is more plentiful than it was earlier in the war.

The surprising mini-glut is real — but do not take too much comfort from it. A full-blown energy disaster may be weeks away.

Two unlikely saviours are shielding the world from catastrophe. One is America.

Its exports of crude and refined products, net of imports, have surged to nine million barrels per day — nearly four million barrels a day above the level at the same time last year.

That reflects the agility of America’s energy firms, which have harnessed their stocks, refineries and terminals to serve more high-paying customers abroad.

It also confirms the usefulness of America’s Strategic Petroleum Reserve, which the government began tapping in March. These extra barrels allowed shipments abroad to rise without crimping domestic supply.

The second accidental hero is China, which is importing 4.5 million barrels a day less crude than a year ago. This reflects weaker consumer demand for dearer fuel. It also follows from the government’s decisions.

Early in the war it banned refiners from exporting products and authorised them to draw on stocks. This reduced refineries’ demand for foreign oil.

This, plus demand-destroying rationing in poor countries, explains the placidity of crude markets. Yet if Hormuz stays closed, a storm will come — and then governments must avoid policies that make it more destructive.

The world entered the war with oil stocks close to 10-year highs.

As importers draw on reserves to offset lost Gulf supply, those could become emptier than ever by June.

A buffer of near-record volumes of oil at sea — made available, in part, by higher Gulf exports before the war — has now largely been exhausted.

Even American and Chinese national reserves will not last for ever, let alone the thin stocks of poor countries.

Soon, therefore, private stocks in the rich world will start being bled.

Prices could then rise convulsively — reflecting both the low absolute level of inventories and their geographically uneven distribution.

Refined products will be hit first. Trapped Gulf exports and cuts to refinery output elsewhere have already drained diesel, petrol and jet-fuel reserves, driving prices up far faster than crude’s.

As stocks vanish, prices will have to rise still more to balance demand and supply.

The shock will intensify if China starts buying more crude. With nearly 1.2 billion barrels in reserve it may, in theory, shun expensive imports for months. But it will also want to preserve a buffer, so it may return to the market.

The other risk is that Donald Trump loses his nerve. He and other America First populists will bridle at exports that soar while domestic stocks dwindle — especially if this pushes petrol above $5 a gallon.

In 2022 such price rises hurt both drivers’ pockets and Joe Biden’s approval ratings as president.

Mr Trump’s administration is already debating a possible export ban. Were it to enforce one, global prices would rise fast.

America’s coasts, which rely on imports, would be hurt by higher import prices and any retaliation from other exporters. Its refiners, seeing margins crushed, would cut output.

The world economy has found some calm in the eye of the energy storm. But it is far from harbour.

A reckless decision by America could all too easily capsize it.