Oil price shock incoming
IT’S starting to happen. The real impact from the closure of the Strait of Hormuz was always going to take some time to land. But a month into the war and the physical shortages of fuel are now beginning to appear across Asia, which gets almost all of its fuel from the Persian Gulf. The volatility we have seen so far is driven mostly by skyrocketing freight and insurance. The actual, physical shortages of fuel have not yet hit. Those are now beginning. Perhaps this is one reason why Donald Trump is blowing hot one day and cold the next.
Why have the physical shortages taken so long to materialise? The answer is that the world started stockpiling oil in huge quantities through most of 2025. When the war began at the end of February, global stockpiles of oil were the highest they have ever been.
All this is borne out in data released by the International Energy Agency, which shows a massive buying spike that began in May 2025. That was the month the International Atomic Energy Agency told the UN that Iran’s stockpile of enriched uranium had now reached a level that had “no civilian justification”. That finding led countries of the European Union to terminate their commitment under the Joint Comprehensive Plan of Action, the Obama-era agreement between Iran and the great powers that Trump walked out of in 2018. Then came the June war between Israel and Iran, culminating in the mega strikes by America on Iranian nuclear facilities.
China began building its stocks of crude oil that May. All through June and July it registered the largest increases in its stockpiles compared to all other countries in the world. In September, the OECD countries began a massive buying spree, triggered in part by a new sanctions package on both Russia and Iran, and also revival of language from all sides that suggested renewed hostilities on the horizon. For the next three months, oil stocks held by OECD countries swelled till they were full to the brim.
Why have physical shortages taken so long to materialise? The answer is that the world started stockpiling oil in huge quantities through most of 2025.
In January and all through February of 2026, the stockpiling continued, this time in what they call ‘oil on water’ inventories, which is basically all the oil held in floating storages like tankers. By the time the war began, global oil inventories had surged to a record high of 8.2 billion barrels. 2025 was probably the year of largest oil buying in recent years, with a surge of nearly 600 million barrels in global oil stocks.
So when the war started, the world was sitting on the largest oil stocks it had probably ever seen. These massive inventories shielded oil markets from the closure of the strait, taking off an estimated 15 million barrels per day (mbd) from global oil flows, around 15 per cent of normal requirement. Oil prices shot up mainly due to freight- and insurance-related disruptions, as well as an uncertain future outlook. But the physical shortages of oil had not yet begun to appear as consumption was fed by the large inventories built up in the run-up to the war.
Those inventories are now nearing depletion, and the physical shortages are beginning to bite. This is the time when the real oil shock begins. J.P. Morgan’s supply chain experts drew up a map of when the last deliveries that left the strait at the start of the war are expected to reach their destinations. For Asia, it is on April 1 and for the US by April 15 and everyone else somewhere in between. The next fortnight, therefore, is the moment when the physical shortages start to land and oil price volatility kicks off in earnest. The releases authorised from various strategic petroleum reserves (SPRs) can compensate only for a fraction of this, and even then for just a few days.
The gap they’re supposed to fill is 20 mbd. This is how the math stacks up — 5 mbd is compensated by using the Saudi Arabian pipeline from the Gulf to the Red Sea port of Yanbu; another 2 mbd can be acquired from the SPRs; something like 1 mbd (at best) can be acquired from the Venezuelan strategic reserves. But as hard as they try, the gap is too large to be filled, and even with 10-12 mbd, the shortfall can prove fatal to the global economy. Think about it as if a human being’s blood oxygen level were to drop to 80. At that level the body will go into systemic organ failure in a matter of days, perhaps even hours depending on its health. You can through various measures maybe increase that to 85, which might prolong life by a little longer, but it does not remove the danger.
This is what the world economy is now looking at. The Australian prime minister called on his citizens to conserve fuel in a televised address in which he announced a National Fuel Security Plan on April 1. Thailand and the Philippines have made similar contingencies, urging citizens to avoid unnecessary travel and to use public transport where possible.
Pakistan could be helped through all this by its diplomacy, because to some extent vessels headed to Pakistan are being cleared through the strait. It is possible that supply-related disruptions could be minimised in Pakistan given the cooperation of the Arab Gulf countries as well as Iran. But the price impact will still hit sooner or later. Additionally, there could be an associated fallout from diplomacy; for example, if a country like the UAE were to ask for its deposit to be returned because they are unhappy with Pakistan not having come to their help militarily. The war is going to test every ounce of resilience and crisis management capacity in this country. And the real test will come if it doesn’t end soon.
The writer is a business and economy journalist.
Published in Dawn, April 2nd, 2026
