West Asia war: Oil could have become cripplingly expensive but three factors contained the disruption

Even as energy prices increased at the start of the West Asia conflict, it soon settled in a range of $90 to $100 per barrel. The International Monetary Fund (IMF) said there are plenty of reasons why oil should have become cripplingly expensive, but the shock absorbers prevented a large-scale disruption. 

The IMG explained that three factors helped close the gap even as by the end of May, more than 1.1 billion barrels of crude, which is equivalent to 10 days of typical global consumption, had not reached the market. 

So, what happened to contain the disruption?

As per IMF, the three shock absorbers were: 

Demand compression: The biggest factor was the compression of demand, especially in Asia, where economies turned to alternatives such as coal and renewables. Transportation demand was stickier because of fuel price caps, subsidies, and tax rebates that contained the impact.

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Ramping up production: As the production in the Gulf fell, countries such as the US, Venezuela, Guyana, and Russia increased production. It increased by nearly 2 million barrels and a day above 2025 levels. 

Inventories: The estimated market deficit of about 4.0 million barrels a day from March to May was met almost entirely by drawing down global stocks. This included commercial inventories in China as well as strategic reserves.

Slow recovery

As US-Iran conflict sees an escalation again, it remains unclear when freedom of navigation through Hormuz will be restored and how quickly shipping, insurance, and operator confidence will follow, said the IMF.

As per industry estimates, it could take two-three months before a significant share of oil flows can resume following a full reopening of the waterway. It said that instead a longer-term concern is that prolonged production halts could cause permanent output losses, especially where financing to restart wells is scarce.

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Lessons for policymakers

The IMF said that despite the sudden blow, the energy markets had room to maneuver and absorb the shocks. But as tensions flare, the room is growing smaller and shrinking further. 

• Inventories play a crucial role in preparing for future economic shocks. Rebuilding these stocks is necessary to strengthen resilience, said IMF.
• The global economy remains vulnerable due to dependence on a single chokepoint. Diversifying energy sources, including renewables, and supply routes is essential.

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• Support measures for consumers should target the most vulnerable groups and remain temporary. This approach helps protect government budgets and preserves price signals that encourage energy saving and efficiency.
• Flexibility in energy markets and timely policy actions have provided the global economy with valuable time. A lasting agreement between the US and Iran could help restore supply.