The oil market's buffers are starting to thin

If you had been told at the start of the year that the Strait of Hormuz would be effectively shut to maritime traffic for over four months, where would you have predicted the oil price? $200 per barrel? $300?

In fact, the peak for front-month Brent crude futures LCOc1 has been a touch north of $114 per barrel, and until yesterday, Brent had traded below $100 per barrel for the last two months, with prices protected by several buffers.

According to ANZ commodity strategists, these include a sharp reduction in Chinese crude imports, emergency inventory releases and Saudi Arabia's ability to export crude from its west coast Yanbu port.

But this is where problems are now starting to arise.

"The recent re-escalation in the Middle East conflict raises concerns about whether these buffers can effectively keep the world supplied with oil," writes ANZ.

"The escalation of fighting – particularly the threat to Red Sea and Bab el-Mandeb shipping – therefore changes the balance of risk."

"It has shifted the market from a crude-routing problem to a broader supply-chain problem involving tanker availability, insurance, financing, refinery runs and refined product availability."

For now, ANZ is maintaining its base case that the peak disruption from the Middle East conflict has passed and we're in an "uneven recovery phase".

But, there is an alternative scenario.

"If oil exports from Persian Gulf producers are further impacted by the Houthis in the Red Sea, the market will have no choice but to increase prices and to utilise the ultimate market buffer – namely, demand destruction," ANZ says.

"Under this scenario, Brent crude could easily hit a new high since the start of the Middle East conflict of around USD120/bbl."