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This week, the response in the oil markets to the tensions following Iran's shooting down of a US drone has seemed muted, stemming from profound changes in the market over the past few years

The oil market shows it can take a punch

Storage tanks at a NuStar Energy facility in Corpus Christi, Texas, June 26, 2017  Image: Brandon Thibodeaux/The New York TimesSo far, this isn’t your typical oil crisis.Previous moments of tension in the Persian Gulf region, like Iraq’s  invasion of Kuwait in 1990, once caused a major kink in oil supplies,  igniting spikes in prices. After all, the Gulf provides around a third  of the world’s oil, and much of that crude passes through the narrow  Strait of Hormuz, which has recently been a target of attacks on  tankers.But this week the response in the oil markets to the tensions  following Iran’s shooting down of a U.S. drone has seemed muted — even  to the surprise of some participants. Analysts say this could stem from  profound changes that have occurred in oil markets in recent years.Production in the United States has risen significantly. America has  become an oil exporter, sharply reducing its purchases of oil from the  Middle East, although that region remains the world’s largest source of  oil overall.Another change this time around: The world’s demand for oil is  growing at a slower pace. One cause for this drop-off is that world  economic growth is slowing, partly over concerns about the trade war  between the two largest economies — the United States and China. But  another, more permanent reason is the slow pivot away from fossil fuels  as a source of energy.Certainly, the tensions in the Gulf could escalate quickly. But oil  markets have evolved, changing the calculus for risk in the region.Persian Gulf tension is having an impactOil prices have moved higher, although modestly, the last few days.  The price for Brent crude, the international standard, has risen about  5.8% since the drone was shot down, trading at about $65 a barrel Friday  morning. But the recent high was about $72 a barrel in mid-May.Oil tanker companies, worried about the safety of their crews, say  they are concerned about operating in the area. With so much business  coming from shipping oil out of the Persian Gulf, the companies would be  reluctant to pull out of the region entirely.“The general area of the Strait of Hormuz represents a real and very  serious risk to shipping,” Robert Macleod, chief executive of Frontline,  a tanker company based in Oslo, Norway, wrote in an email. “Ships must  continue to passage the area but all precautions must be put in place.”A Frontline tanker, the Front Altair, was one of two tankers in the Gulf of Oman attacked June 13.Tanker charter rates have ticked up substantially over the last week,  hitting about $28,000 a day for chartering the largest class of  tankers. Insurance premiums for shipping in the area have also risen. If  anything, though, tanker operators have been disappointed that prices  have not risen even higher in late 2018, the operators were able to  charge about $50,000 a day.“Rates have increased some, though not as much as many had thought or  even hoped for,” wrote Fearnleys, an Oslo-based ship broker, in a  report published Wednesday.U.S. oil production can cushion disruptionsTraders may be shrugging off the threat of disruptions in the Gulf  knowing that a shortage could be made up by surging supplies from the  United States.A boom in oil and natural gas production in the United States in  recent years, driven mainly by shale drilling, has shaken up world oil  markets and revived the United States as a petroleum power. That trend  is expected to continue.Oil production in the United States grew by an extraordinary 17% last  year, and natural gas output was up by 12%. In the last decade, the  United States has added roughly 6 million barrels of oil a day, the  equivalent of the combined production of the United Arab Emirates and  Kuwait, two stalwarts of the Organization of the Petroleum Exporting  Countries.Canada, too, has seen its oil output surge, up 8.5% last year.The explosive growth has weakened OPEC’s  hold on the oil markets and cut gasoline prices sharply around the  world, as supplies from the United States make their way into  circulation. Under pressure, OPEC and Russia have joined forces in  coordinating production cuts, but they have not been able to restore  prices to the $100-a-barrel levels of 2014.Traders know that because OPEC and Russia are keeping oil in the  ground, there are large volumes of additional oil that could be  unleashed on the market.The pace of world oil demand is slowingThe oil market’s tame response so far to the threats of disruption  has surprised some analysts. Others, though, point to fears about the  world economy and say that signs are emerging that growth in demand for  oil, which had been strong in recent years, is sharply easing.The research firm IHS Markit concluded recently that some major  markets were experiencing an actual contraction in demand for oil, “the  largest such decline since the worst of the financial crisis” of 2008.Analysts say that if a weaker global economy continues to soften  demand for oil, then relentlessly increasing supplies from the United  States and elsewhere may swamp the markets.“As long as growth held up, you could absorb all the growth of U.S.  supply,” said Roger Diwan, vice president for energy at IHS Markit. “Now  with weaker demand, the global supply growth is going to overwhelm  global demand growth,” he added.What if oil shipments were cut off?It is important to keep in mind that there has been no actual disruption of oil flows from the Gulf region.But a major episode might well roil the markets. Analysts say that it  would be very difficult to replace a large portion of the 21 million or  so barrels of oil that flows through the Strait of Hormuz on an average  day.A major disruption would likely do the most damage to Asian  economies. According to the U.S. Energy Information Administration, a  government agency, 76% of the crude oil that flowed out of the Persian  Gulf through the Strait of Hormuz went to Asian markets like China,  India and Japan.But a cutoff of supplies would not be in  the interest of any of the countries in the region, including Iran,  which still exports what oil it can through the Gulf. Oil provides a  vital source of revenue for many governments in the region.The United States has shown in the past that it is willing to go to  great lengths to keep the sea lanes open. In the 1980s, for instance,  after dozens of ships were damaged during the conflict between Iraq and  Iran, navy vessels from the United States and other countries escorted  tankers through the area. This time around, the United States might seek  help from other oil importing countries like China and Japan.

The oil market shows it can take a punch

This week, the response in the oil markets to the tensions following Iran's shooting down of a US drone has seemed muted, stemming from profound changes in the market over the past few years

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