Six months into the Iran war, OPEC+ is facing an unprecedented challenge to its influence over global oil markets. The alliance, which once had considerable power to shape prices by adjusting production, is now struggling to offset supply disruptions caused by the war and the effective closure of the Strait of Hormuz.
The conflict has damaged energy infrastructure in several OPEC countries and restricted the movement of Middle Eastern crude through one of the world’s most important oil shipping routes. As a result, OPEC+’s share of global oil production has fallen sharply.
According to Reuters calculations based on International Energy Agency data, OPEC+ accounted for around 40% of global oil output in July, down from more than 48% before the United States and Israel attacked Iran in late February. Around four to five percentage points of that decline resulted from the United Arab Emirates’ withdrawal from OPEC in May.
The alliance’s core group of seven producers, including Saudi Arabia and Russia, accounted for only around a quarter of global oil production in July.
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Hormuz Limits OPEC+’s Power
The Strait of Hormuz has fundamentally changed the way OPEC+ can influence the market. Saudi Arabia, Iraq, Kuwait and other producers depend heavily on the waterway to export crude, meaning that increasing production is of little use if additional oil cannot reach international buyers.
Since March, the core OPEC+ group has announced six increases in oil output. However, most of those increases have remained largely theoretical because of the restrictions on shipping through Hormuz.
This represents a major shift from previous oil crises. OPEC has faced supply disruptions before, including during the Gulf War and the aftermath of the 2003 invasion of Iraq. What makes the current crisis different is that several major producers are being affected simultaneously, leaving the group with fewer options to compensate for lost supplies.
From OPEC+ Decisions to Physical Supply
The difference between the current crisis and previous market disruptions is increasingly important.
In earlier years, traders focused heavily on OPEC+’s decisions about how much oil it would produce. During 2019, for example, the group’s production policies regularly influenced global prices and were closely watched by markets.
Today, the central question is different: how much oil can producers physically produce and export?
The Hormuz disruption has weakened the link between OPEC+ decisions and actual global supply. Even when producers announce higher output, the additional barrels cannot necessarily reach consumers.
That has reduced the immediate impact of OPEC+ announcements on oil prices and weakened the alliance’s traditional role as the market’s swing producer.
China Emerges as a Swing Force
At the same time, China has emerged as one of the most important forces shaping global oil demand.
Chinese crude imports have fallen dramatically since the war began. The country has purchased around 400 million fewer barrels than during the same period last year, according to Reuters.
The decline has been supported by lower refinery activity, restrictions on fuel exports and the increasing electrification of China’s transport system.
This weaker demand has helped prevent oil prices from rising even further despite the enormous supply disruption caused by the war.
China’s influence extends beyond its recent reduction in consumption. Its heavy oil purchases in the previous year helped support global demand and provided a floor for prices.
As one analyst described it, China has become a “swing demand centre”, capable of influencing the market through both increased and reduced purchases.
China’s Growing Strategic Influence
China’s changing role suggests that influence over the oil market is becoming less concentrated in the hands of traditional producers.
OPEC+ has historically influenced prices primarily by managing supply. China, however, can influence prices through the demand side of the market because of the enormous scale of its energy consumption.
Its ability to reduce imports during periods of disruption can effectively place a ceiling on prices. Conversely, aggressive purchasing for strategic reserves can strengthen demand and support prices.
This gives Beijing a form of market influence that does not depend on controlling oil production.
Analysis
The Iran war has exposed a structural weakness in OPEC+’s traditional market power. Production capacity only provides leverage when producers can actually move their oil to international markets. The disruption at Hormuz has limited that ability, making OPEC+’s output decisions less effective.
China’s growing role is therefore significant because it represents a shift from supply side power to demand side power. Beijing does not need to control global production to influence prices. Its purchasing decisions alone can alter the balance between supply and demand.
The longer the war and Hormuz disruption continue, the more this dynamic could strengthen. OPEC+ may remain the world’s most important producer alliance, but China’s ability to determine how much oil the global market actually absorbs is giving Beijing increasing influence over prices.
The broader implication is that the future of global oil power may depend less on who controls the most barrels and more on who can control the balance between supply, demand and access to markets.
With information from Reuters.
