Quicktake: Why Strait of Hormuz tensions did not spur wild oil price swings

Oil prices inched up 1% after Iran seized a British-flagged tanker in the Middle East's biggest chokepoint

Swedish tanker Stena Impero, which sailed under a British flag was captured by the IRGC late on Friday. EPA

Iran seized a British oil tanker in the Strait of Hormuz on Friday escalating tensions with the UK in the critical energy chokepoint, but oil markets were tepid and did not respond with a major upswing.

Oil prices gained about 1 per cent on Friday, erasing four days of losses, but did not reach session highs for the day nor react as commodity analysts would have expected.

The National explains why the oil market did not react with as much upward swing as prices would have done a few years ago in similar conflicts and situations.

The shale revolution in the US

The US has shifted from being an importer of oil to becoming a major producer. The use of fracking technology in shale formations has boosted the US to become the world’s largest crude producer. While the Strait of Hormuz remains strategically critical as a passageway for a third of oil traded globally, the increase in the global oil supply from the US helps mitigate the volatility in oil price swings during times of tension. US crude oil output in April rose to a new monthly record, surpassing 12 million barrels per day, according to the US Energy Information Administration. The US produced 12.16 million barrels per day (bpd) of crude in the month, up 246,000 bpd from a month before.

The US is projected to lead oil-supply growth over the next six years, due to the "incredible strength" of its shale industry, that is triggering a rapid transformation of global oil markets, according to the International Energy Agency (IEA).  By 2024, the US will export more oil than Russia and will close in on Saudi Arabia – a "pivotal milestone" that will bring more diversity of supply in markets, the IEA says.

Weak oil demand

Global demand for oil is forecast to drop in 2019 because of a global economic slowdown amid an ongoing US-China trade spat. The IEA is revising its forecast for global oil demand this year downwards to 1.1 million barrels per day (bpd) and may cut it again if the global economy-- and specifically China-- weakens further, Fatih Birol, IEA's executive director, told Reuters. The cut to 1.1 million bpd comes after the agency forecast last year that 2019 oil demand would grow by 1.5 million bpd, then in June this year it reduced the growth forecast to 1.2 million bpd.

The IEA said on Friday it does not expect oil prices to rise significantly because demand is slowing and there is an oversupply in global crude markets.

A substantial supply of oil is coming into the market from the US, about 1.8 million bpd, as well as oil from Iraq, Brazil and Libya, Mr Birol said.

While not seeing a huge increase in oil prices, Mr Birol warned that serious political tensions could yet impact market dynamics.

Analyst reactions

Helima Croft, head of global commodities research at RBC Capital Markets, said oil is not responding to the tensions in the Middle East as it has in the previous years.

“What I find amazing is oil has become a broken barometer for Middle East conflict. A few years ago, you could almost gauge how serious a security crisis was because of the oil price,” Ms Croft said in an interview with CNBC on Friday.

Daniel Yergin, vice chairman of IHS Markit, said the "market reaction was relatively tepid" compared to what it would have been several years ago due to weak oil demand and a glut of oil supply in the market.

"There's enormous growth of US oil production, which  changed the market psychology and took out the sense of risk compared to when the US was a major oil importer," he said.