Hormuz crisis: oil markets move from disruption to chaos

The global oil market perception of Operation Epic Fury is sliding rapidly from seeing the conflict as a “disruption” into what could become a full-scale “crisis.” Given the limited oi storage capacity in the Gulf and inadequate alternative pipeline network to the Red Sea, the region will hit a production shutdown crisis point after only 25 days.

So far, the consensus has been the conflict will be temporary, not lasting much longer than a month. But as oil storage tanks in the Gulf reach capacity and oil companies start shutting down production – which is already happening – that will trigger a change in perspective. At that point even if the kinetic war slows and talks start, the damage to the market will be significant and last much longer. Typically, in a major conflict it takes several weeks, if not months, for markets and politicians to full process what just happened. And we are still in the first week of this conflict.

The blockade of the Strait of Hormuz has left Gulf exporters unable to ship crude and they are rapidly running out of storage capacity. Iraq’s tanks are due to hit full today and Kuwait at the end of next week. the Kingdom of Saudi Arabia (KSA) has the biggest tanks, but will run out of space in a month. Production shut-ins will take months to reverse. At the same time, major importers such as China and India have begun curbing fuel exports as a precautionary measure, tightening supplies further.

So far, the oil price reaction to the Hormuz crisis has been relatively moderate while traders still see the war as a “disruption.” Brent crude is trading at around $85 per barrel, compared with roughly $72 per barrel on February 27 and around $65 in January, before the US and Israel launched strikes against Iran. The risk of prolonged production outages on the supply side, combined with export restrictions by large consuming nations, could trigger a deeper shift in market sentiment. Until now, markets may have underestimated the scale and duration of the disruption.

Suppliers act

About 20mn barrels per day (bpd) of crude oil and petroleum products normally transit the Strait of Hormuz, equivalent to roughly one-fifth of global oil consumption. The narrow waterway serves as the main export route for Saudi Arabia, Iraq, Kuwait, the UAE and Qatar, not to mention Iran itself.

Producers in the Gulf States can continue to flow from wells into pipelines and storage tanks, but being unable to export, the system will quickly back up. JPMorgan estimated on March 2 that onshore crude storage capacity across Gulf producers amounts to roughly 343mn barrels, equivalent to around 22 days of output that could become stranded if exports are unable to leave the region. In addition, about 60 empty tankers currently in the Gulf could provide temporary floating storage capacity of roughly 50mn barrels.

If the Strait of Hormuz remains completely blocked, the bank said that Middle Eastern producers would be able to maintain normal production levels for no more than about 25 days. Beyond that point, storage capacity would be exhausted, leaving producers little choice but to curtail output or shut in wells until export routes reopen.

Some Gulf producers have limited ability to redirect crude flows through pipelines that bypass the Strait of Hormuz, but the available capacity covers only a fraction of the region’s normal exports.

The most significant alternative route is Saudi Arabia’s East-West pipeline, which transports crude from the kingdom’s eastern oilfields to the Red Sea port of Yanbu. The line has a capacity of about 5mn bpd, although it briefly handled around 7mn bpd in 2019 after natural gas liquids pipelines were temporarily converted to carry crude, according to Reuters. Saudi Arabia exported roughly 7.2mn bpd in February, with 6.38mn bpd normally shipped through Hormuz, meaning the pipeline could theoretically redirect a substantial share of Saudi flows.

However, traders and analysts note that Yanbu’s loading capacity is significantly lower, with shipments historically peaking at just under 1.5mn bpd, according to Kpler.

The UAE has a smaller bypass route. The Habshan–Fujairah pipeline can carry about 1.5mn bpd from inland fields to the port of Fujairah on the Gulf of Oman, allowing shipments to reach international markets without passing through Hormuz.

Even when combined with Saudi Arabia’s East–West pipeline, these alternatives would allow only around 6-7mn bpd of crude to bypass the strait under optimal conditions. That is far below the roughly 20mn bpd of oil and petroleum products that typically transit Hormuz each day, meaning most Gulf exports will remain stranded if the waterway stays closed. 

Both pipeline routes also carry their own risks — namely potential Iranian attacks on the infrastructure and limited tanker availability at alternative loading terminals.

A prolonged disruption would risk forcing producers into operational decisions that could outlast the crisis itself. Once storage capacity is exhausted, exporters would have little option but to shut in wells across the region’s major producing fields. While wells can sometimes be closed temporarily by simply shutting valves at the wellhead, the process becomes more complicated if production remains halted for extended periods.

In the short term, wells that are shut in for days or a few weeks can generally be restarted relatively quickly once export routes reopen. But wells left idle for longer periods may require inspections, pressure management, or other operational work before production can resume. In large, highly pressurised reservoirs typical of the Gulf, operators also tend to ramp production back gradually to avoid damaging the reservoir or associated infrastructure.

Buyers react

Importing countries are also beginning to take defensive measures, raising the prospect that fewer refined products will circulate on global markets even if crude supply disruptions remain limited. China, the world’s largest crude importer, has instructed refiners to halt signing new fuel export contracts and attempt to cancel already committed shipments, according to Reuters. The guidance, issued as tightening crude supply from the Middle East disrupts refinery operations, is expected to reduce Chinese exports of gasoline, diesel, and jet fuel from April onwards.

China typically manages fuel exports through a quota system administered by the National Development and Reform Commission (NDRC), allowing Beijing to balance domestic supply and demand. The country imported around 4.2mn bpd of oil in 2025, while exporting over 52mn tonnes of refined petroleum products.

China has built up a large buffer, stockpiling over 1mn bpd of crude last year alone. Beijing has prioritised the stockpiling of oil over the past decade, particularly amid heightened tensions with the US and the risk of a possible blockade of the Strait of Malacca – another key maritime chokepoint. The country now has the equivalent of over 70 days of its crude consumption in reserve.

India, the world’s third-largest oil importer, has also begun taking precautionary steps. State-run Mangalore Refinery and Petrochemicals has declared force majeure on gasoline exports for March and April after difficulties securing crude cargoes, according to Reuters. The company operates a 300,000-bpd refinery in southern India and typically exports around 40% of its refined fuel output. More broadly, Indian refiners rely on the Middle East for about 40% of their crude imports, leaving the country particularly exposed to disruptions in Gulf shipping. Government officials say India currently holds crude inventories sufficient for roughly 25 days of demand, explaining why refiners are prioritising domestic supply as the Hormuz crisis unfolds.

Decisions made in China and India will have a knock-on effect for the rest of the world – particularly Europe.  China and India have become increasingly important exporters of refined products such as diesel, gasoline and jet fuel to the continent since the EU embargoed Russian petroleum products in 2023.