Global economy nears ‘red zone’ as Hormuz crisis drains oil buffers: IEA

The world could be heading towards a fresh energy shock unless the Strait of Hormuz is fully reopened within weeks, according to Fatih Birol, Executive Director of the International Energy Agency (IEA), who has warned that the global economy is rapidly running out of the buffers that have so far prevented a much deeper oil crisis.

In one of his starkest assessments since the outbreak of the US-Iran conflict, Birol said the world is approaching a critical juncture as emergency oil inventories are depleted and peak summer travel demand begins to gather pace across Asia, Europe and North America.

“If we are not able to see a fully and unconditional opening of the Strait of Hormuz by the end of June, July and August, we may be entering the red zone for the global economy, especially in Asia,” Birol warned.

The warning comes despite crude oil prices retreating from their wartime peak of nearly $144 a barrel to around $95. Analysts say the decline has created a false sense of security, masking the severe supply disruptions that continue to threaten global energy markets.

According to the IEA, the current conflict has removed more oil and gas supplies from the market than the combined disruptions caused by the 1973 oil embargo, the 1979 Iranian revolution and the 2022 Russia-Ukraine energy crisis.

“We are facing the largest energy crisis in history,” Birol said. “The amount of oil and gas lost in this conflict exceeds the combined losses from the major energy crises of the last half-century.”

The Strait of Hormuz remains the focal point of concern. Roughly 20 million barrels of crude oil and petroleum products pass through the strategic waterway every day, representing about one-fifth of global oil consumption. The route is also critical for liquefied natural gas exports from Qatar, which accounts for about 20 per cent of global LNG trade.

Buffers are shrinking

While alternative routes and emergency inventories have softened the immediate impact, Birol warned that these buffers are rapidly shrinking.

“When this crisis began, we had surplus production capacity, commercial inventories and strategic reserves. We have been drawing on all of them for months. Those cushions are now diminishing,” he said.

To stabilise markets, the IEA coordinated the largest emergency stock release in its history in March, injecting 400 million barrels into global markets. The move helped drive oil prices down by about $20 a barrel and eased immediate supply fears.

Yet Birol stressed that the release was only a temporary remedy rather than a permanent solution.

The 400-million-barrel intervention represented roughly 20 per cent of the strategic reserves available to IEA member countries, leaving about 80 per cent still available for deployment if market conditions deteriorate further.

For now, however, the agency sees no immediate need for a second emergency release.

“We are monitoring markets continuously. If conditions warrant further action, we are ready to act immediately and decisively. But at this stage, we are not there yet,” Birol said.

The warning carries particular significance for Asia, which remains heavily dependent on imported energy. China, India, Japan and South Korea collectively account for a substantial share of Gulf crude imports, making the region especially vulnerable to prolonged disruptions.

India, the world’s third-largest oil importer, sources nearly 90 per cent of its crude requirements from overseas markets. Elevated oil prices have already contributed to the rupee’s sharp decline this year and increased concerns over inflation and economic growth.

Billions in burden

Economists estimate that every $10 increase in crude oil prices adds billions of dollars to India’s import bill while widening the current account deficit.

The IEA chief also cautioned against describing current oil prices as low simply because they have retreated from their wartime highs.

“Prices remain about $30 higher than they were before the war started,” he said. “That is already causing significant pain for oil-importing countries and putting upward pressure on inflation.”

Many market analysts share the concern.

Ole Hansen, head of Commodity Strategy at Saxo Bank, recently noted that oil markets remain vulnerable because inventories are falling while geopolitical risks remain elevated. He warned that any prolonged disruption in Hormuz could quickly reverse recent price declines.

Similarly, Vivek Dhar, Mining and Energy Commodities Strategist at Commonwealth Bank of Australia, has argued that the market is underestimating the challenges involved in restoring Gulf energy exports even after a ceasefire.

Birol echoed those concerns, saying that reopening Hormuz alone would not immediately restore normality.

“It would be naive to think everything returns to pre-war conditions overnight,” he said. “Even if an agreement is reached, restoring production, shipping logistics and export infrastructure will be a rocky process.”

Countries such as Saudi Arabia and the UAE are expected to recover more quickly because of their strong financial resources, storage capacity and infrastructure resilience. However, nations with more limited storage facilities and damaged energy assets could take considerably longer to restore exports.

UAE’s role

The UAE, which recently announced its decision to leave Opec while accelerating plans to expand production capacity, could emerge as one of the key stabilising forces in global energy markets. Abu Dhabi has already invested heavily in spare production capacity, strategic storage facilities and export infrastructure designed to withstand supply disruptions.

Yet even those advantages may not fully shield the global economy if Hormuz remains constrained through the summer.

Analysts say for now, the IEA’s message is clear: the world has survived the first phase of the crisis thanks to emergency inventories and strategic reserves. But unless normal shipping resumes soon, the global economy could be entering a far more dangerous phase where shrinking buffers, rising demand and fragile supply chains collide.

That prospect, Birol warns, could push oil prices higher again and prolong inflationary pressures at a time when many economies are already struggling to regain momentum.