Why hasn't the oil price exceeded $150 despite the three-month blockade of Hormuz?

The blockade of the Strait of Hormuz has lasted for about three months, and although international oil prices have surpassed $100 per barrel, they have not yet reached the $150 mark predicted by many analysts. This seemingly calm market performance does not mean that the supply shock has been absorbed, but rather that the global oil system is buying time with three buffers - inventory, idle capacity, and shrinking demand. Once these buffers are depleted, the real impact on oil prices may just be beginning. While oil prices have risen significantly, the current level is still below the peak after the Russia-Ukraine conflict in 2022, and far from the historical highs before the 2008-2009 financial crisis. The orderly operation on the surface of the market masks a safety margin that is rapidly being consumed. For investors, the current price level may be misleading. It reflects the market's ability to absorb the initial shock, rather than the ability to sustain this balance. As buffer resources are gradually depleted, the fragility of the system will continue to rise, and the path towards oil prices reaching $150 is becoming clearer. Inventory: seemingly stable "shock absorbers" are failing One of the reasons why the oil market has not seen a more severe reaction is because global inventories were higher than expected before the crisis erupted. These inventories acted as buffers, delaying rather than eliminating the impact of the supply shock. Data shows that global commercial inventories have been declining for several weeks, with OECD member countries' inventories falling below the five-year average. Data from independent tracking agencies like Vortexa and Kpler also show a steady decline in floating storage levels. This process looks orderly and moderate on charts, with prices rising but not skyrocketing. However, inventories are not strategic reserves, but the minimum working inventories required to maintain the normal operation of refineries, pipelines, and blending operations. Once inventories fall below this operational threshold, the flexibility of the entire system will be lost - refineries will have fewer options for crude oil varieties, blending will become more difficult, and minor disturbances that were previously easily absorbed will begin to have a greater impact. More critically, the consequences of inventory depletion are lagging. Weekly data may appear unremarkable, but the consequences will become concentrated when the system runs out of buffer space. Moreover, the more barrels of inventory that are used to cushion shocks, the longer the difficulty and cycle of replenishing inventory will be. Idle capacity: Limited and non-interchangeable Another reason why there has not been greater panic in the market is the widespread belief that OPEC still holds idle capacity. From a textbook perspective, this is true. Saudi Arabia and a few other oil-producing countries do have the ability to increase production. However, at the operational level, idle capacity cannot fully replace the lost supply from the Persian Gulf. There are three reasons for this: firstly, not all crude oil is interchangeable, different grades of crude oil correspond to different refinery configurations; secondly, capacity release is not immediate, even if capacity exists, putting it into production takes time and coordination; and thirdly, and most importantly - idle capacity itself is limited. Using it to fill major supply gaps will directly compress the system's margin of error in dealing with subsequent shocks. Once this buffer is depleted, the market's sensitivity to any additional disturbances will increase significantly. Therefore, idle capacity has played a stabilizing role in the short term, but has not eliminated the fundamental imbalance between supply and demand. Demand cooling: Marginal effects rather than structural changes Changes on the demand side have also to some extent dampened the rise in oil prices. High oil prices naturally lead to some degree of demand destruction: consumers reduce driving, airlines hedge risks or cut routes, and industrial users seek efficiency. Fuel consumption is particularly sensitive to price increases in emerging markets. At the same time, global economic growth has been uneven, which has also softened demand to some extent, partially offsetting the impact of the supply shock. However, this is not a structural decline in demand, but a temporary loosening at the margin. Once economic activity rebounds, or consumers gradually adapt to the high-price environment, demand may quickly rebound. At that time, the various buffer mechanisms currently supporting market operations will come under greater pressure. Two paths: normalization or price reassessment From the current situation, the market faces two starkly different paths. The first is a relaxation of the situation. If the Strait of Hormuz reopens or oil flows partially recover, the market can start to rebuild inventories and drive supply and demand normalization. In this scenario, oil prices may stabilize or even fall from current levels, but the likelihood of returning to pre-lockdown prices in the short term is very low. The second is a continuation of the situation. If the blockade continues, inventories will continue to decline, idle capacity will be further depleted, and the system's margin of error will disappear. At that time, the market will be forced to reprice the remaining supply more aggressively. This is when the path towards oil prices reaching $150 becomes more credible - not necessarily because of new shocks, but because all buffers have been depleted. The fact that the three-month blockade has not pushed oil prices to $150 shows that the market has greater short-term flexibility than many had expected. But flexibility does not equal sustainability. The current balance depends on resources that are rapidly being consumed and difficult to replenish. In this context, the lack of a sharp spike in oil prices should not be interpreted as a signal that the market has mitigated risks, but rather as a warning that the adjustment process is still ongoing. This article is a repost from Wall Street Seen, edited by GMTEight: Chen Wenfang.