Oil Market Outlook Shifts as Strait of Hormuz Reopening Nears

China has reduced crude imports by about 3 million barrels per day and tapped more than 1 billion barrels of commercial and strategic reserves since May, limiting the price impact of supply losses that exceed 1 billion barrels. Brent crude fell below $78 a barrel on Monday after trading at a four-year high of $114 a barrel in early May.

Prices had settled below $70 a barrel before the conflict began.

China limited exports of refined products and increased use of electric vehicles, which cut oil consumption by roughly 1 million barrels per day last year according to International Energy Agency estimates. One in two new passenger cars sold in China is now a new energy vehicle.

Analysts at Societe Generale noted that a 7 percent loss in global crude supply during the 1973 Arab embargo raised prices 134 percent, yet current losses affecting 14 percent of supply have produced smaller price increases.

Excess supply could reach the market as early as next month if the strait reopens quickly, injecting 100 million barrels of previously stranded oil. Iran may increase its own output if sanctions are lifted, though that could reduce the discount at which China has purchased Iranian crude.

Several countries have already met summer demand, leaving China as the main potential absorber of any oversupply.