Quantifying the Total Oil Supply Shock

JPMorgan pegs the gross supply shock at 16 MMB/d initially, easing to roughly 10 MMB/d by April as rerouting, substitution, and emergency response mechanisms begin to absorb some of the blow. But as Natasha Kaneva rightly frames it, this is the kind of event that pushes commodity modelling to the outer edge of its usefulness.

A war involving Iran and the Strait of Hormuz does not come with a tidy historical template. There is no clean analog for a disruption of this size moving through such a strategically vital artery, with multiple state actors, military uncertainty, and global energy infrastructure all tied into the same risk knot. The biggest variable is not the barrels themselves. It is the clock.

Washington and Tel Aviv have sent mixed signals on how long any conflict might last, while Tehran appears to believe time is an ally, not an enemy. And even if active hostilities were to fade, that does not mean the Strait simply swings open and trade snaps back to normal. Shipping confidence, insurance, routing risk, and naval security all linger well after the last missile stops flying. So the duration of the shock remains unknowable with any precision.

But the market does not need perfect clarity on time to understand the scale of the threat. The structure of the shock is much easier to map. We can identify the barrels at risk. We can estimate what can be rerouted, what can be replaced, and what cannot. We can measure the limits of SPR releases, spare capacity, freight constraints, and refinery substitution. Policy makers may be able to cushion the blow, but they cannot repeal physical bottlenecks.

That is the key distinction. The timeline is uncertain, but the arithmetic is not. In oil, uncertainty sets the mood, but barrel math sets the price.

Let’s look at the numbers.

Today

• Iran flows only: Iran is effectively the sole exporter still pushing barrels through Hormuz, running at about 1.8 mbd, with passage tightly controlled and volumes limited

• Saudi rerouting ramp: Saudi Arabia has lifted Red Sea exports via Yanbu from roughly 0.8 mbd to 3.3 mbd, adding about 2.5 mbd through westbound bypass routes

• UAE pipeline increase: The UAE has raised Fujairah pipeline throughput from 1.1 mbd to 1.6 mbd, contributing an additional 0.5 mbd outside the Strait

• System still choked: Despite these workarounds, the bulk of Gulf crude remains constrained, with Hormuz effectively frozen

• Total supply sidelined: Nearly 16 mbd of oil is still stranded or disrupted, sitting outside normal global market circulation

In April

• Iran steady state: Iranian exports likely hold near ~1.8 mbd, with no meaningful expansion but no immediate collapse either

• Saudi upside lever: Saudi Arabia has the clearest runway to increase flows, with Red Sea exports potentially rising another ~1.5 mbd to ~4.7 mbd as pipeline efficiency improves

• Still below capacity ceiling: Even at ~4.7 mbd, flows remain well under the East West pipeline’s 7 mbd capacity, contingent on Yanbu sustaining near ~5 mbd export capability and Red Sea routes staying secure

• Geopolitical choke points remain: Any disruption from Houthi activity or Red Sea instability could quickly cap or reverse these gains

• UAE capped out: Fujairah pipeline flows are effectively maxed, leaving little to no incremental upside from the UAE side

• Policy response takes center stage: Governments step in as marginal suppliers, with coordinated action becoming the swing factor

• SPR crude release: A joint US and IEA response could inject around ~1.2 mbd of crude into the market over a limited window

• Refined product buffer: Additional releases of ~0.9 mbd in refined products help ease downstream pressure, but do not fully replace lost crude flows

The loss of Middle Eastern barrels is no longer a pricing story for Asia, it is a physical one. Shortages are already surfacing across the region, and nowhere is the strain more visible than in Southeast Asia, where energy security has always been a just in time exercise rather than a stockpiling strategy. With limited domestic refining buffers and deep reliance on imported crude and products, the region is now being forced to tap its emergency drawer. The combined commercial product inventories across Indonesia, Taiwan, Thailand, Vietnam, Malaysia, and their regional peers sit near 129 million barrels, which can be mobilized into roughly 1 mbd of supply for a few months. That is not a solution, it is a bridge.

The real swing factor sits further north. China remains the single largest shock absorber in the global system, not because of policy rhetoric but because of sheer scale. Its strategic and commercial inventories, combined with its role as the marginal buyer of seaborne crude, give Beijing the ability to lean against volatility in a way no other actor can. In theory, China could release between 0.5 and 1.0 mbd to stabilize refinery runs and cap product price spikes. In practice, the signal from policymakers is far more cautious. State owned refiners are being quietly steered away from tapping reserves without explicit approval, suggesting Beijing is treating this not as a moment to spend barrels, but as a moment to protect them. Any drawdown, if it comes, will be deliberate, conditional, and measured against a much longer horizon of energy security.

That restraint raises a more uncomfortable question for the market. If this is not the moment to deploy emergency reserves, then what is. When the head of the IEA frames the current disruption as the most severe threat to energy security on record, and Beijing still chooses preservation over intervention, it tells you those barrels are being held back for something more existential. Markets may not say it out loud, but the implication sits just beneath the surface. Strategic oil is not only about price stability, it is about geopolitical optionality. And in that context, Taiwan inevitably enters the conversation.

Around the edges, there are smaller buffers trying to plug a much larger hole. Floating storage offers some incremental relief, with Iran holding roughly 38 million barrels and Russia another 17 million barrels of crude and products. With sanctions effectively softened, these barrels can now move more freely to the highest bidder, contributing around 0.5 mbd back into the market. But this is marginal supply, not transformational. Much of these flows were already leaking into the system through alternative channels. The real impact of formal easing is not in creating new supply, but in legitimizing existing flows. It allows large state buyers in China and India to step in more openly, displacing smaller, more risk-averse participants.

In the end, this is a market running on buffers, not balance. Inventories are being drawn, policy barrels are being rationed, and marginal supply is being reshuffled rather than created. The system is not healing, it is coping. And coping has a shelf life.

In the end, even a full-scale policy response only softens the blow, it does not remove it. The system can mobilize reserves, reroute flows, and lean on every available buffer, but the gap does not close. You are still staring at a structural shortfall in the order of 10 mbd, and that is simply too large to engineer away.

At that point, the market defaults to its oldest and most ruthless adjustment mechanism. Price does the job policy cannot. Higher crude prices are no longer just a signal, they are the tool forcing balance back into the system. And that process is already underway.

With physical barrels scarce and feedstock costs surging, refiners are starting to pull back. Runs are being cut not out of choice, but necessity, as margins compress and availability tightens. That reduction in throughput feeds directly into the next layer of stress, shrinking product output just as shortages are already taking hold. It is a feedback loop the market knows well, and it rarely ends gently.

What follows is the phase every trader recognizes but no one welcomes. Demand destruction. It has arrived, not as a forecast but as a live dynamic. End user consumption is beginning to erode, hit from both sides, outright scarcity on one hand and punishing prices on the other. This is how the system rebalances when supply cannot respond.

The pain is not evenly distributed. With Hormuz effectively shut, the shock is being funneled into specific product chains. Naphtha, LPG, and jet fuel are taking the brunt, reflecting both their regional dependency and the structure of Gulf exports. These are the pressure points where the system is now breaking first.

This is no longer a story about how much oil is missing. It is about how much demand has to disappear to compensate for it.

The shock is now moving downstream, and this is where the real economic damage begins to compound. Petrochemicals are first in the firing line. Naphtha and LPG sit at the heart of plastics production, so when those feedstocks tighten, the system does not bend, it shuts. Already, roughly 5% of global ethylene capacity across Japan, South Korea, and China has gone offline. That is not just a supply adjustment, it is the industrial engine starting to stall.

Aviation is next to feel the squeeze, and it is a pure margin story. When jet fuel pushes beyond 20% of operating costs, airlines do not hedge the pain away, they cut routes. Capacity is pulled, frequency drops, and marginal routes disappear first. Africa and parts of Europe sit closest to that fault line, where demand is thinner and pricing power is weaker.

Governments will try to lean against the largest demand pools, gasoline and diesel, because that is where policy still has some traction. The COVID playbook comes back into view. Work from home mandates, lower speed limits, and even number plate rationing start to reappear as tools to suppress consumption without triggering outright economic shutdowns. It is not elegant, but it buys time.

But diesel is where the system really feels it. This is the fuel of the real economy. When diesel tightens, tractors slow, excavators stop, and trucks move less frequently. Agriculture, construction, and transport all begin to lose momentum at the same time. That is not just demand destruction, that is activity destruction.

At that point, the adjustment is no longer confined to energy markets. It starts bleeding directly into growth.