Moneycontrol Pro Panorama | OPEC+'s paper barrels

The deeper problem is that the global oil market has little cushion left.

Dear Reader,

When OPEC+ gathered for its monthly video conference on Sunday, the group made its most consequential—and most inconsequential—decision in years. The coalition, led by Saudi Arabia and Russia, approved an output increase of 206,000 barrels per day (bpd) starting in April. On paper, it was larger than the 137,000-barrel increments the group had been rolling out. In practice, analysts were quick to call it what it was: a signal, not a solution.

“This move is unlikely to calm markets,” said Jorge Leon of Rystad Energy, a former OPEC secretariat official. “You can announce higher production, but if tankers face constraints in Hormuz, the physical market remains tight.” That observation gets to the heart of the problem. When the world's most critical oil shipping lane effectively shuts down — as the Strait of Hormuz has in the wake of US and Israeli military strikes on Iran — adding barrels to production quotas is an optical exercise. Crude priced at the wellhead is worthless if it cannot reach a buyer.

The Strait of Hormuz, a narrow corridor between Iran and Oman, is the jugular vein of global energy markets. Roughly 20 million barrels per day of crude and refined products pass through it — close to 20 percent of global supply. Since the conflict escalated, vessel traffic through the strait has dropped to a trickle, with at least a dozen empty tankers diverting away from the eastern side of the chokepoint. Ship owners and insurers are simply unwilling to risk their vessels in an active war zone.

In this context, OPEC+'s 206,000 bpd increase amounts to barely 0.2 percent of global oil demand — and even that modest figure will not reach markets if tankers cannot sail. Brent crude jumped as much as 13.6 percent to $82.37 a barrel on Monday, its highest in 12 months, barely pausing for the OPEC+ announcement. Analysts at Citigroup placed Brent's near-term range at $80–90 while Wood Mackenzie warned that prices could exceed $100 per barrel if flows are not quickly restored. Goldman Sachs estimated an $18-per-barrel war risk premium embedded in current prices.

Even setting aside the logistics crisis, the deeper problem is that the global oil market has little cushion left. The International Energy Agency estimates that meaningful spare production capacity is almost entirely concentrated in Saudi Arabia and the UAE — together holding around 2.5 million barrels per day, or less than 3 percent of global supply. Some analysts believe even this figure flatters reality.

"Spare capacity is really only sitting in Saudi Arabia at this stage, with the rest of the producers effectively maxed out," said Helima Croft of RBC Capital Markets. "Everything that you bring on now leaves less in reserve."

With OPEC+ having already restored roughly 73 percent of the 3.85 million barrels per day it halted since 2023, the remaining ammunition is limited.

While oil dominates the headlines, the disruption to liquefied natural gas markets may be equally severe — and is attracting far less attention. Qatar, the world's second-largest LNG exporter, ships 100 percent of its output through the Strait of Hormuz, accounting for roughly 20 percent of global LNG supply. With tankers already diverting, the consequences for gas-importing nations in Europe and Asia are stark.

Goldman Sachs analysts estimate that a month-long halt to LNG exports through the strait could send Asia's spot LNG price surging 130 percent, from around $10–11 per MMBtu to $25. European natural gas markets, still rebuilding reserves after the post-Ukraine energy crisis, are also highly exposed. ING's commodity strategists note that while new US LNG export capacity is coming online, it cannot ramp up fast enough to offset a sudden loss of Qatari volumes.

Israel's curtailment of production from its own offshore gas fields adds a further layer of vulnerability. The combination of disrupted Gulf exports, reduced regional production, and inelastic demand in key importing nations creates the conditions for a significant and sustained price spike in gas markets — one that could prove just as economically damaging as the surge in crude.

Markets will ultimately be governed not by production quotas but by how quickly the shooting stops. If the Strait of Hormuz reopens promptly, tankers can resume transit quickly, easing supply bottlenecks. If the conflict drags on, strategic reserve releases, demand destruction among price-sensitive buyers, and a pivot by India back to Russian crude will offer partial relief — but no full substitute for restored flows. For now, OPEC+'s paper barrels remain exactly that.

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