10,000 Inactive Wells and High Costs.. Why the Oil Market Won't Return to Pre-Iran War Levels?

SadaNews - Oil prices dropped immediately after the announcement of a framework to end the Iran war, but the rapid decline on trading screens does not signal a return to the market conditions that existed before the war. Estimates from oil companies, traders, and analysts indicate that restoring flows and rebalancing stocks, transport, insurance, and production may take months, and could extend to a year or more if the truce remains in place.

Brent crude oil contracts for August fell today, Wednesday, to below $80 a barrel after U.S. President Donald Trump declared that the 106-day war was over and called for a resumption of oil flows. However, energy and shipping companies did not view this political event as sufficient for a return to normal operations through the Gulf, according to the Financial Times.

According to the U.S. Energy Information Administration, the Strait of Hormuz accounts for about a quarter of seaborne oil trade and nearly one-fifth of global consumption of oil, petroleum products, and natural gas.

Shell's CEO, Wael Sawan, believes that the market may need "about a year or more" before restoring balance because the system has faced not only a disruption in shipping but has internal bottlenecks in storage, production, fleets, and strategic reserves that will not improve simply by reducing the immediate price of crude.

Choking Point

The actual return, as reported by the Financial Times from analysts, depends on the arrival of empty tankers into the Gulf before loaded tankers depart because export tanks in the region became full during the weeks of war. Widespread oil pumping cannot resume until storage space is created to allow crude to flow smoothly from wells to ports.

However, bringing ships into the Gulf first requires ensuring that the main corridors in the Strait of Hormuz are clear of mines and redirecting tankers that strayed to other areas during the war. This issue was described by the CEO of Saudi Aramco, Amin Nasser, as a problem of global fleet positioning, rather than oil availability alone, according to the British newspaper.

Shipping companies seem more cautious than politicians. The head of Mitsui O.S.K. Lines, Goutaro Tamura, mentioned that shipping lines need to see the agreement reflected in reality in the Strait of Hormuz. At the same time, the head of C.M.B. Tek, Alexander Safiris, confirmed that his company would not cross the strait until it was fully convinced of its safety.

Insurance costs are contributing to the slow return. Companies are waiting for the response of underwriters in London and Lloyd's, while war risk premiums remain high, approaching 7.5% of the value of the ship for some international tankers, a cost that translates into millions of dollars weekly for a single oil tanker, according to the Financial Times.

Platts estimates that announcing the Strait of Hormuz as "open for trade" will require 30 to 45 days of calm, a return of a wide range of insurance companies, and the resumption of at least 50% of traffic prior to the war, not just the limited exit of tankers from the region.

Inactive Wells

Even if shipping and insurance obstacles are removed, the return to production will be gradual. According to Rystad Energy estimates, about 10,000 of the 36,000 oil wells that were operational in the region before the war are now out of service, some needing technical remediation due to loss of pressure, wear, or mechanical failures.

Morgan Stanley anticipates that only 50% of oil and gas production in the Gulf will return by September, and 80% by December, meaning that the market may remain in a state of partial supply shortage for months after the confrontations have ended, even as prices continue to decline from wartime peaks, according to the Financial Times.

Material damage to energy facilities prolongs the recovery period. Despite the possibility of most of the Ras Laffan liquefied natural gas complex in Qatar resuming operations relatively quickly, the damaged parts may require 3 to 5 years for full repair, according to the newspaper, while the UAE stated that repairs on its largest gas processing facility will take until next year.

Fragile Inventory

Wael Sawan stated that the world was "borrowing from the future" to compensate for the lost Middle Eastern oil, as an estimated deficit of about 1.2 billion barrels of unproduced or unsourced crude accumulated during the war, with the figure potentially rising to nearly 2 billion barrels by the end of the year if the restart of fields, refineries, and shipping routes continues to be slow.

The shock has been partially contained, according to the British newspaper and the U.S. Energy Information Administration, through reducing the operating rate of refineries in Asia, China relying on its inventories instead of increasing imports, and releasing large amounts of strategic reserves in the U.S. and Europe. However, this absorption has made the system less able to cope with a new disruption in a major refinery, maritime corridor, or production area.

Although Brent crude reached $118 a barrel during the war, it remained below the July 2008 peak of $147. However, this reflects the destruction of part of the demand, inventory usage, and government interventions to mitigate the shock to consumers and companies, according to the newspaper.

Inflation Persists

On the other hand, central banks in Europe view the end of the war as relieving pressure rather than an end in itself. Officials at the European Central Bank have indicated that high energy costs will remain for a longer period than expected, and that damage in the Middle East cannot be reversed overnight, according to Bloomberg.

The European Central Bank fears that the energy shock could lead to broader increases in prices and wages within the eurozone, keeping inflation well above the 2% target. Thus, analysts and traders quoted by Bloomberg do not rule out further interest rate hikes this year despite falling oil prices.

Philip Lane, the chief economist at the European Central Bank, stated that four months of rising energy prices will mean inflationary pressures will manifest in food, goods, and services this year and next year, even if oil prices continue to decline post-agreement.

Bloomberg Economics notes that Brent could fall to a range of $70 to $75 if the agreement is signed and implemented, but this scenario does not negate the effect of previous months of rising energy prices nor does it dispel uncertainty regarding the details of any nuclear or security agreement with Iran.

Reshaping Supply Maps

Major energy companies connect short-term recovery with a longer reshaping of supply maps. Gulf states are exploring pipeline routes that bypass the Strait of Hormuz, while energy-importing countries in Asia and Europe are looking to diversify suppliers, having demonstrated the costs of relying on a narrow single corridor during the war, according to Bloomberg.

New gas deals reflect this trend, as Japan signed a 20-year agreement to import liquefied natural gas from Malaysia, while Lorenzo Simonelli, the CEO of Baker Hughes, mentioned that he expects an expansion in global LNG projects aimed at reducing dependence on the Gulf.

Analysts believe that Iran's continued practical control over the strait's movement may prevent a return to 100% of previous energy levels, especially if transit fees or security arrangements arise that Western companies fear could violate U.S. sanctions.

Shipping companies recall the experience of the Red Sea, according to the Financial Times, where shipping activity remained about 50% below pre-2023 levels despite de-escalation agreements, which makes Hormuz a candidate for a similar trajectory, including an initial rapid price drop followed by a cautious and slow return to trade, and then a market that is more volatile than the one that existed before the war.

Matthew Wright, a shipping expert at Kepler, summarizes the dilemma for the newspaper by stating that the problem is no longer just the quantity of available oil but the confidence in the safety of the route and the ability of the controlling parties in the strait to manage it as a regular trade corridor—a confidence that may take 12 to 18 months to return to acceptable levels for companies and importers.