When they finally reopen, the U.S. and neighboring Gulf countries will be quick to welcome the development, but the resulting flood of oil into the market risks eroding its already fragile control over the market, Reuters analysis says. The and closure of the critical sea passage — through which almost a fifth of the world’s oil and natural gas passed before the conflict — have significantly reduced OPEC production and shifted the center of gravity of the energy industry away from the Middle East.
Riyadh’s options for dealing with these changes are limited. It remains unclear both when the Straits will reopen and under what conditions. While US President Donald Trump insists that shipping must return to pre-war levels, Iran appears determined to retain some degree of control over the passage, suggesting recovery will be gradual, uncertain and difficult.
However, despite the general uncertainty, one outcome seems almost inevitable: Saudi Arabia, Bahrain, the United Arab Emirates, Qatar, Kuwait, Iraq and Iran will try to maximize oil exports to cover the huge budget gaps caused by the conflict. The loss of about 13 million barrels per day of exports from the Middle East — about 13 percent of global supply — since the war began on Feb. 28 amounts to more than $80 billion in lost revenue, according to estimates. Damage to energy infrastructure, including refineries, storage facilities, tankers and LNG plants, is in the tens of billions of dollars.
Incentives to quickly restore production are huge, given pent-up demand from major energy importers, particularly in Asia. Asian governments and refiners have significantly curbed consumption during the conflict and have drawn on their stockpiles. Many will seek to make up for them. However, supply and demand are unlikely to be restored at the same time.
Initially, it could take months for Middle Eastern producers to restart much of the roughly 11 million barrels per day that have been shut down. It is also unclear how much demand has actually been lost and how much has simply been shifted. Coupled with geopolitical concerns, an uneven recovery is likely to trigger further price swings.
Historically, such conditions would strengthen the role of OPEC. The agency and its allies, including Russia, have repeatedly intervened to stabilize markets in past crises, such as during the COVID-19 pandemic. This time, however, the organism seems much weaker.
A weakened OPEC
The war has left OPEC fragmented and weakened. Its production fell to an average of 20 million barrels a day in April from 31 million in February, according to data from the US Energy Administration (EIA). OPEC’s share of world production has fallen to an all-time low of around 22%.
More significantly, the United Arab Emirates’ decision in April to leave the organization to pursue its own production-boosting strategy severely damaged OPEC’s cohesion and Saudi Arabia’s influence.
In addition, Russia’s inability to increase exports due to Ukrainian attacks on energy infrastructure limits its role as a “regulator” in the wider OPEC+ alliance.
Against this background, the possibility of Hormuz reopening could put Saudi Arabia in a difficult position, as OPEC countries will compete fiercely for market shares, increasing supply and pushing prices down.
Saudi Arabia may struggle to convince other producers to cut output to support prices.
Path to oversupply
Although the supply recovery will not be immediate, the risks point to an oversupply. The return of OPEC supplies, along with high production from the US, Brazil and Venezuela, could lead to a surplus of about 5 million barrels per day after Hormuz fully reopens, according to analysts’ estimates.
Non-Gulf producers have strengthened their positions during the crisis, which makes it harder for Gulf countries to regain market share without aggressive pricing.
Although OPEC has historically engaged in “price wars”, such a move now, after one of the biggest supply disruptions in decades, could lead to uncontrolled developments and hasten the end of the organization’s era, Reuters points out.
