In this Market Pulse report, we analyze how the market will rebalance after about 20 million barrels per day were removed from flows through the Strait of Hormuz. This adjustment is driven by supply cuts, refinery operating reductions, limited rerouting, demand erosion, and inventory drawdowns, but it remains incomplete, making the system more structurally tight.
Sixty days after the disruption, the Strait of Hormuz continues to operate at minimum capacity, with only limited ship movement observed. What initially appeared as a logistical bottleneck, has now developed into a long-term structural imbalance, resulting in a significant reduction in the flow of raw and refined products from the Middle East and Gulf region to global markets.
As shown in Table 1, cross-Strait flows collapsed from about 20 million barrels per day before the oil outage to nearly 1 million barrels per day in April, highlighting the scale of the supply shock.
The market has responded through a multi-layered adjustment process, combining supply-side curtailment, refinery run reductions, logistics redirection, demand erosion, and inventory withdrawals, as detailed in Table 2.
The initial response came through crude oil supply cuts, as producers reduced production while export routes remained restricted. This has been reinforced by refinery operating cuts, particularly in the Middle East, where refinery outages and export bottlenecks have pushed utilization to multi-year lows. In Asia, as a region dependent on crude oil imports, the limited availability of raw materials also limits productivity. Refinery outages and supply losses are expected to continue as long as the strait remains restricted. Under our baseline assumptions, only a partial recovery in flows is expected from June, followed by a gradual improvement thereafter. Together, these two levers make up the bulk of the immediate rebalancing process.
Logistical adjustments provided only partial relief. Pipeline reroutings have increased, particularly via Saudi Arabia’s East-West Pipeline and UAE crude flows being routed via Fujairah, with additional volumes of around 2.9 million bpd in March and around 4.2 million bpd so far in April compared to January and February levels. However, these flows remain structurally limited and are not sufficient to compensate for the lost volumes transported by sea. Likewise, existing barrels of water were redirected to deficit areas, which helped alleviate imbalances in the short term but provided only temporary support.
On the demand side, early signs of consumption erosion are beginning to appear, especially in price-sensitive regions such as Asia, East Africa, and Latin America. Rising shipping costs and tight availability are gradually impacting end-user prices, causing demand to decline, albeit with a delay.
Stocks continue to act as a key buffer zone. Onshore and water commodity withdrawals, along with major hubs such as ARA, the US and Singapore, are helping to fill supply gaps. However, inventory support remains limited and cannot sustainably offset long-term disruptions.
As shown in the chart, more than two-thirds of the rebalancing came from supply cuts and refinery run reductions, highlighting the limited flexibility of alternative adjustment mechanisms.
In fact, the rebalancing process occurs through:
• Reducing supply at source (fundamental modification)
• Reductions in refinery operations (minor but significant)
• Limited redirection of flows
• Demand erosion
• Withdrawals of crude oil stocks and products through onshore storage areas, refineries and terminals
• Drawing oil on water
However, these mechanisms are based on redistribution rather than addition. The system does not replace lost Gulf barrels in the Middle East; He absorbs them.
conclusion
The global oil market now operates in a low-elasticity, high-friction environment, where supply losses are offset by constrained adjustments rather than new supply. While a gradual recovery is expected under the base case from June onwards, the rebalancing process remains incomplete.
In essence, the market is solving an outage of more than 20 million barrels per day primarily by destroying supply rather than replacing it. The loss of flows in the Strait of Hormuz will not be compensated for, but will only be redistributed, making the system structurally more compact and increasingly dependent on inventories and demand adjustment to maintain cohesion.
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Source: Kepler
