Global oil inventories are nearing their lowest point in eight years, and traders are still pricing crude as if the strain will ease quickly. Brent crude hovered around $100 a barrel in the past week after touching a post-Iran war peak of $126 in April, while West Texas Intermediate stood around $100 after reaching $113 on April 7.
Goldman Sachs analysts estimated that global oil stocks could fall to 98 days of global demand by the end of May, a level that would leave the market far thinner than it looks on paper. Chen Chien-Ming said the market had been complacent and that there was clearly an oil shortage, but futures prices were being held down by market-moving headlines and investors’ wishful thinking that the war would soon end. He said prices were not overwhelming yet and added that “we haven’t yet reached a point of no return.”
That gap between price and supply is what is worrying energy traders now. Chen estimated that 20 million barrels of oil passed through the pre-war Strait of Hormuz each day, and said that with the waterway closed for close to 70 days, the deficit now ran to more than 1 billion barrels. Analysts have said oil prices could rise past $150 a barrel if the Strait of Hormuz remained closed through the end of June, turning an already tight market into a far more severe energy crisis.
JPMorgan analysts wrote on April 30 that global oil inventories were in relatively strong shape heading into the Iran conflict, and said that buffer had worked as a shock absorber moderating the increase in global energy prices. But they also estimated that only 800 million barrels out of 8.4 billion barrels in storage are realistically usable without sending the whole system into operational stress. They said floating storage can be tapped quickly, while only a slice of onshore inventories, around 580 million barrels, is readily accessible. As of late April, governments had already released 280 million barrels to cushion the impact of the conflict.
The strain is especially acute in Asia, where Dutt Pushan said the region is the most exposed because most countries aside from Malaysia and Indonesia are big oil importers. He said they are also heavily industrialized and need a lot of natural gas and electricity, which means a prolonged disruption could tip some weaker Asian economies into recession and drive up food and fuel prices for hundreds of millions of people.
Sushant Gupta said the current shock is different from the Russia-Ukraine war, when Russian barrels could still find buyers in other markets. “We can’t compare the Russia-Ukraine war to the Iran conflict, because in the latter, we are seeing a physical loss of supply for two months,” he said. He added that the market is backwardated, meaning futures prices are lower than current prices, which usually signals tight prompt supply. For now, the numbers point to a market that can still absorb the blow — but only just, and not for much longer.
