By Matt Egan, CNN
New York (CNN) — One of the biggest mysteries of the global economy is why the oil market has remained so calm during one of the greatest supply shocks in history.
The Strait of Hormuz has been paralyzed by three months of war — a nightmare scenario that few thought was possible before the war with Iran started. Visible traffic through the Strait of Hormuz remains sparse, estimated at just 15% of pre-war levels, according to JPMorgan.
Yet oil futures have not skyrocketed to the dangerous levels forecasters feared — at least not yet.
One theory is that a surprisingly large amount of crude is escaping the double blockade of the Strait of Hormuz, helping the global energy system absorb the historic shock. Tankers carrying these so-called “clandestine flows” may be dodging the blockade by turning off transponders to avoid detection, experts told CNN.
JPMorgan estimated that clandestine flows amounted to about 2.1 million barrels per day over the final two weeks of May. That would represent a small but notable chunk of the 15.6 million barrels that flowed through the Strait of Hormuz per day before the war.
“Despite the ongoing naval blockade and the steep decline in commercial traffic, surprising volumes of crude and petroleum products still appear to be transiting the Strait,” Natasha Kaneva, JPMorgan’s head of global commodities strategy, wrote in a client note last week.
‘Ghost’ transits
Bob McNally, founder and president of Rapidan Energy Group, told CNN he agrees that clandestine flows may have delayed or somewhat mitigated the crisis.
“We assume Hormuz traffic has been 0% to 10% of prewar flows, but with this leakage it could be a little higher,” McNally said. “It’s not nearly enough to avoid big and bullish inventory draws, but it does take some of the edge off.”
Jan Stuart, global energy economist and strategist at investment bank Piper Sandler, estimates that about 2.9 million barrels per day of crude made it out of the Strait of Hormuz in May. That estimate includes about 2.1 million barrels on vessels that appeared to pay tolls to Iranian entities.
The rest is about 900,000 barrels of “ghost” transits, vessels that went through the waterway in the dark with transponders off.
“The ghosts, or clandestine flows, help,” Stuart told CNN. “There has been far better mitigating of the crisis than I would have thought possible.”
China slashes imports
Brent oil futures, the international benchmark, dropped to $93 a barrel on Friday. That’s well above pre-war levels of around $70 but also safely below the recent peak of $114.
But clandestine flows aren’t the biggest factor behind the market calm.
Piper Sandler estimates that about 4.5 million barrels of crude per day have left the Persian Gulf through other means, mostly via the East-West Pipeline that connects Saudi oilfields to the Red Sea port of Yanbu.
And even more importantly, China has slashed its crude imports, turning instead to massive stockpiles.
Lower demand from China, one of the world’s biggest consumers of energy, has helped ease the supply crunch.
JPMorgan’s Kaneva argued other factors include deeper-than-recognized demand losses and larger-than-reported inventories.
“Taken together, these adjustments help explain why prices near $100 are not signaling that the disruption is small,” Kaneva wrote. “Rather, they are signaling that the market has found ways — albeit costly ones — to absorb it.”
‘Things are going to get worse’
Some oil veterans worry the market, lulled by these workarounds, is underestimating the real-world impact.
Commercial oil stockpiles have declined sharply since the war started. America’s emergency pile of crude, the Strategic Petroleum Reserve, is rapidly heading toward the lowest level since the early 1980s.
“Things are going to get worse,” said Stuart of Piper Sandler.
Stuart is forecasting Brent will average $130 a barrel in July and August.
If that forecast is right, it implies gas prices will surge above $5 a gallon this summer, compared with around $4.20 today.
Stuart suspects higher oil prices will need to rise quickly to incentivize further emergency oil releases and to encourage the world to consume less.
“You’ll need to persuade people. That’s far easier to do when prices are high,” he said.
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