The closure of the Strait of Hormuz, following US-Israeli strikes on Iran, has led to a significant disruption in Middle East oil and gas production.
In just over a week, more than 12 million barrels of oil equivalent per day (boepd) of production has been taken offline, according to a Rystad Energy analysis.
This includes 7 million barrels per day (bpd) of crude supply, which represents approximately 7% of total global liquids demand.
Market impact and oil price surge
Iraq has suffered the most significant impact, seeing over 60% of its pre-conflict volume cut.
The more serious concern, however, is the likelihood that the worst is still ahead.
In a worst-case scenario, as analysed by Rystad Energy, crude output from the Middle East could drop significantly to roughly 6 million bpd.
This represents a substantial, region-wide reduction of 70% compared to the pre-conflict baseline.
“Further cuts from major Middle East oil producers cannot be ruled out as storage tanks fill to the brim, bypass infrastructure approaches its limit, and the conflict shows no sign of a near-term resolution,” Aditya Saraswat, MENA research director, Rystad Energy, said in an emailed commentary.
“Although the likelihood of oil supply falling to 6 million bpd is not our central case, it is still very much in the cards.”
Meanwhile, Brent crude oil prices surged past $106 a barrel on Monday, driven by renewed concerns about security threats to Middle East oil infrastructure, despite US President Donald Trump’s call for international protection of the vital Strait of Hormuz.
Consequently, both crude oil benchmarks have seen a surge of over 40% this month, reaching their highest levels since 2022.
Following the Kharg Island military strikes, which export about 90% of Iran’s oil, Trump threatened further attacks on the island, potentially provoking further retaliation from Tehran.
In response to the Kharg attacks, Iranian drones hit a significant oil terminal in Fujairah, United Arab Emirates.
Excluding Iran, the Middle East’s oil supply has dropped by 33% in just over a week, falling from a pre-conflict base of 21 million bpd to a current level of only 14 million bpd, according to Rystad Energy data.
Analysing two categories of supply risk
However, this remaining 14 million bpd figure is uncertain, as it comprises two supply categories with significantly different risk profiles.
The first is the supply that is actively at risk of further curtailment.
The crude oil production from Kuwaiti and Iraqi fields, totalling about 1.5 million bpd, is currently sustained only by the temporary requirement for domestic refinery feedstock, the Norway-based energy intelligence company said.
Kuwait’s refining capacity is 1.42 million bpd, but local demand is only 360,000 bpd.
Since there are no export options, refined oil product storage is quickly reaching capacity, even with reduced processing rates.
Once these storage tanks are full, refinery operations must be further curtailed.
This, in turn, will reduce the necessary crude supply, indicating that the production floor is not stable but continues to fall, the agency added.
Supply that is bypass-dependent constitutes the second category, totalling around 6.5 million bpd, Rystad said.
This supply’s only route to export markets is through the UAE’s ADCOP pipeline, which goes to Fujairah, and Saudi Arabia’s East-West pipeline, which runs to Yanbu.
“This supply is physically moving as of March 13, but it is moving through infrastructure that has already been subject to attack. Case in point is Fujairah, where loading capacity and tanker availability constraints remain,” the agency said.
Crude grade shortages and substitution challenges
The outage in Saudi Arabia significantly impacts crude grades as well as volume.
Arab Heavy and Arab Medium, which account for most of the 2.2 million bpd loss, are vital for complex Asian refineries.
While Arab Light and Arab Extra Light are still offered via Yanbu spot tenders, Arab Medium is currently unavailable.
Refineries unable to easily replace lighter grades without incurring configuration penalties are now forced to compete for heavy crude alternatives from distant sources in the Americas and West Africa, according to Rystad.
This introduces significant new challenges, including increased freight costs, longer lead times, and feedstock uncertainty, further straining an already tense market.
Furthermore, if the market loses Iranian oil due to continued attacks on its infrastructure, the most suitable substitutes—Arab Heavy and Arab Medium—would become unavailable, the agency said.
“A potential winner here is Russia, which could provide some additional barrels, as stronger drilling activity may lift Urals supply by around 200,000 to 300,000 bpd, but even that would only cover a fraction of any potential loss of Iranian crude,” Saraswat said.
The current analysis indicated that no viable substitutes for Arab Heavy and Arab Medium are available in the near term.
This lack of alternatives will precipitate a historic supply crisis unless the conflict is resolved within the next few weeks.
“If and when the crisis reaches an end, it will take months to restore operations to pre-conflict levels, with the questions of infrastructure integrity and a recalibrated geopolitical order still at play,” Saraswat added.
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