While the blockade of the Strait of Hormuz continues to drag on alongside the Iran war, energy analysts warn of another shockwave that could end up hitting global markets.
The blockade of the Strait of Hormuz is forcing oil producers on both sides of the Persian Gulf into a storage crunch, with Iraq already cutting production and JPMorgan warning that Saudi Arabia, the United Arab Emirates and other regional producers could face similar pressure within weeks, if crude oil continues filling storage facilities. If storage reaches operational limits, producers may be forced to close wells, risking permanent reductions in the future production of oil from the region, experts told the Daily Caller News Foundation.
“When the takeaway capacity disappears, the operator has little choice but to close the valve,” Steve Hanke, a professor of applied economics at Johns Hopkins University and has been analyzing OPEC since the ’80s, told the DCNF. “Artificial lift is taken offline, kill fluid or chemical inhibitors are introduced to protect the wellbore, and the producer absorbs significant costs both during the shut-in and at the eventual restart.”
Potential damage to the industry may include a risk of permanent production losses in the event of oil well closures, otherwise known as “shut-ins.”
“The strongest wells can be returned to service within days, while most require weeks or months of intervention,” Hanke said. “Marginal wells often require years, and some never return at all. Following the 2020 [COVID-19] episode, a portion of restoration work waited as long as two years simply because qualified service crews were unavailable.”
A prolonged or potentially permanent shutdown of oil production across the Middle East from a crisis in capacity would further shake up an already upended global energy market.
‘The Clock Is Ticking’
Saudi Arabia could run out of storage space by May 8, even with rerouting, according to JPMorgan data reported by Bloomberg, which showed Saudi Arabia may have had only 65 days of storage left 56 days ago, on March 4.
“With the Strait of Hormuz still inactive, the clock is ticking,” JPMorgan analysts stated in a note reported by Bloomberg.
Iraq has already begun a large reduction in oil production at its largest oil field, Rumaila, and the West Qurna 2 project, Bloomberg reported, citing sources granted anonymity to discuss non-public information.
The Ju’aymah terminal in Saudi Arabia “was quickly running out of spare capacity,” Antoine Halff, co-founder and chief analyst of geospatial analytics company Kayrros, said in a LinkedIn post on March 3.
Iraq, Kuwait and Qatar have all announced force majeure, circumstances preventing them from fulfilling some oil and liquefied natural gas contracts, Reuters reported.
Iran is amassing so much unsold oil that it is resorting to derelict storage tanks as an emergency measure, The Wall Street Journal reported.
The war has seriously jolted oil prices, which spiked by 7% on Wednesday to over $107 per barrel, according to CNBC’s public market tracker.
“Oil is what we like to call price inelastic, which is a fancy way of saying the price has to go up pretty dramatically before you stop buying it,” E.J. Antoni, chief economist at The Heritage Foundation, told the DCNF. “And sure enough, that’s what we’ve already seen.”
“Right now we’ve largely been able to counter the roughly 20% drop in global oil production by simply dipping into our rainy day fund,” Antoni told the DCNF. “Whether private stockpiles or a public stockpile, like here in the United States, we have a strategic petroleum reserve.”
The U.S. Strategic Petroleum Reserve currently holds just under 400 million barrels of oil, according to the U.S. Energy Information Administration. The Trump administration agreed to release 172 million barrels of oil from the strategic reserve in March to ease turmoil in the market, S&P Global reported.
“It means similar effects to what we saw during the pandemic, which was all kinds of supply disruptions, significant increases in prices, again, not just for energy, but for countless other prices throughout the economy,” Antoni told the DCNF. “Energy affects the price of everything we do and everything we buy. So if you’re going to cause such dramatic disruptions to global oil markets, you can expect pretty dramatic increases in prices around the world.”
‘No Guarantee’
The loss of pressure is not the only issue that affects wells during a shut-in; naturally occurring paraffin wax can build up in pipelines, machinery and valves, which can be costly to remove.
“Restoration costs run from roughly $50,000 on a stripper well to $400,000 or $500,000 on a higher-flow well, and even after that expenditure, there is no guarantee that prior production rates will be recovered,” Hanke told the DCNF.
Restoring one shut-in offshore oil well in the United Arab Emirates would have required a costly heavy-rig workover, but a rigless repair saved the operator about $14 million, one Weatherford case study states. Similar repairs may have cost more than $6 million, Offshore Engineer reported.
“If they have to shut in entire fields, that means you’re going to have to blow down the pressure in the pipelines,” David Blackmon, an energy and public policy analyst, told the DCNF. “That means whatever refineries are being fed by those fields are going to have to be closed in and lose pressure and repressurizing major pipelines and refineries can take weeks and months to accomplish.”
It wouldn’t be the first time shut-ins have derailed countries’ ability to restart oil production, with Venezuela serving as a chief example.
“So, looking at what we know about Iran in terms of both the well characteristics and also the infrastructure, there would likely be permanent losses of production, similar to what we have seen in Venezuela over the last couple of decades,” Antoni told the DCNF. “Because of the Communist takeover and the lack of investment in maintenance, they have lost so much production permanently that they may never be able to get back up to previous per day barrel per day quotas.”
It is “certainly possible” that Iran could be in a similar situation, Antoni told the DCNF.
It will take “years and many billions of dollars” to restore Venezuela’s oil production to a level that resembles what it had in the past, the Council on Foreign Relations reported.
However, not all of Venezuela’s oil is gone. A Treasury Department Office of Foreign Assets Control report states that some U.S. companies may be permitted to buy Venezuelan oil, or what is left of it.
Some of what Venezuelan oil is left has already been shipped overseas to Israel, Bloomberg reported, citing sources who remained anonymous because the information was not public.
Shipping through the Strait of Hormuz is still severely affected by the blockade, despite a U.S.-Iran ceasefire on April 8. Fewer than seven vessels a day have crossed the strait in recent days, according to reporting by Reuters.
As of Wednesday, the ceasefire from April 8 is still in effect.
President Donald Trump met with oil executives on Tuesday to discuss the possibility of the U.S. naval blockade of the Strait of Hormuz lasting for months, according to Axios.
“Nothing is ever really simple in the oil and gas industry,” Blackmon told the DCNF.
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