How resilient are global oil markets to geopolitical shocks?

Key takeaways:

• Disruptions in the Strait of Hormuz and attacks on oil pipelines have constrained crude oil supplies, while attacks on Russian refineries have reduced the availability of refined products, particularly diesel.

• Both gasoline and diesel supplies have been affected, but diesel shortages are more severe because of disruptions to Russian refining capacity and the time required to process crude oil into finished products.

• Diesel shortages carry significant economic consequences because the fuel is essential for industry, trucking and shipping, making disruptions particularly damaging to economic activity.

• Europe’s dependence on imported refined products is not the root cause of the crisis. Rather, the underlying drivers are the wars in Iran and Ukraine and the resulting geopolitical disruptions.

• The global refining system has a strong track record of adjusting to supply imbalances, suggesting that shortages of refined products could ease over time if no further major disruptions occur.

• Oil prices could fall rapidly if flows through the Strait of Hormuz return to normal, although the need to replenish depleted inventories could limit the decline.

• China’s future purchases to replenish its strategic petroleum reserves could establish a floor under crude oil prices, potentially around the $60 per barrel level observed before the latest disruptions, although the outlook remains uncertain.

• Broad fuel subsidies and tax cuts risk encouraging consumption when supplies are scarce, while placing additional pressure on government finances.

• Developing economies, particularly in Southeast Asia, face significant financial and coordination challenges in building adequate emergency fuel reserves, despite their vulnerability to supply disruptions.