Iran war is draining world’s oil buffer at an unprecedented pace

The world has burned through oil inventories at a record speed as the Iran war throttles flows from the Persian Gulf, eating into the very buffer that protects against supply shocks.

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The rapidly shrinking stockpiles mean that the risk of even more extreme price spikes and shortages is getting ever-closer, leaving governments and industries with fewer options to cushion the impact of the loss of more than a billion barrels of supply, two months into the near-closure of the Strait of Hormuz. The sharp depletion will also mean the market stays vulnerable for longer to future disruptions even after the conflict ends.

Morgan Stanley estimates global oil stockpiles dropped by about 4.8 million barrels a day between March 1 and April 25 — far exceeding the previous peak for a quarterly drawdown in data compiled by the International Energy Agency. Crude accounts for almost 60% of the decline, and refined fuels the rest.

Crucially, the system also requires a minimum level of oil, which means that the “operational minimum” is reached long before the inventories actually hit zero, said Natasha Kaneva, JPMorgan Chase & Co.’s head of global commodities research.

“Inventories are acting as the shock absorber of the global oil system,” she said. But “not every barrel can be drawn.”

There are some signs that the drawdown may have slowed slightly in recent days, according to Goldman Sachs Group Inc., which pointed to weaker demand from China, the world’s top oil importer — leaving more available for other buyers. Still, global visible oil stocks are already close to their lowest since 2018, the bank said.

Estimating global inventories involves both art and science. A large part are strategic caches of crude and fuel controlled by governments, either directly or by requiring the industry to maintain a level of reserves that can be released when needed, or a combination of the two. But there’s also a huge amount in commercial stockpiles — the inventories of oil producers, refiners, traders and distributors held as part of normal business operations.

The most immediate points of stress are in a handful of fuel-import-reliant countries in Asia, with traders pointing to Indonesia, Vietnam, Pakistan and the Philippines as the biggest worries, potentially hitting critical levels of supplies in as little as a month. Larger economies in the region, particularly China remain comfortable for now.

However, European jet-fuel stocks are also depleting fast just as summer vacations approach, and some analysts predict they could hit critical levels as soon as June.

Operational Minimum

JPMorgan’s Kaneva warns that inventories in the Organisation for Economic Co-operation and Development could reach “operational stress levels” early next month, if the strait doesn’t reopen, and then “operational minimum” floors by September. That’s the point when the world hits the bare minimum amounts of oil needed for pipelines, storage tanks and export terminals to function properly.

The US, which has become the supplier of last resort to the world, has already drawn down domestic inventories of crude and fuels to below historical averages as exports surge. US crude stocks, including the nation’s Strategic Petroleum Reserve, have dropped for the last four straight weeks, according to government data. US distillate stockpiles were at their lowest point since 2005 at the end of last week, while gasoline stockpiles were hovering near their lowest seasonal levels since 2014.

While America’s oil drillers have started to turn the taps on, executives have warned that inventories are likely to keep falling in the short-term.

Even if the waterway reopens, Gulf output and shipping is unlikely to return to normal levels any time soon, meaning fuel users could have to dig even deeper into storage tanks.

The conflict has already sent physical crude and key fuel prices surging, threatening higher inflation and intensifying the risk of a global recession. It has left India suffering liquefied petroleum gas shortages, prompted airlines to cancel flights and hit US drivers with soaring gasoline costs.

Global oil consumption has already dropped sharply, in part because of supply disruptions, and in part because of higher prices. But as inventories get closer to critical levels, analysts, traders and executives warn that prices will need to spike to a level that chokes off significantly more demand in order to balance the market.

“A lot of the inventory and spare capacity has been depleted already,” Chevron Corp. Chief Financial Officer Eimear Bonner told Bloomberg TV on May 1. “We are going to start to see some import-dependent countries potentially start to face critical shortages as we get into the June-July time-frame.”

“Top of my mind in terms of places facing imminent shortage is gasoline in Asia, with countries like Pakistan, Indonesia or the Philippines likely to be the first to face issues with tank bottoms,” said Frederic Lasser