Dire warnings regarding global oil supplies have escalated recently, particularly due to the ongoing closure of the Strait of Hormuz. This vital waterway remains largely inaccessible following a series of geopolitical tensions, exacerbated by President Donald Trump’s unsuccessful diplomatic efforts during his trip to China to facilitate its reopening.
While market investors have clung to hopes that a ceasefire in Iran would stabilize the situation, evidence suggests that the return to normal oil trade is still far from imminent. Experts predict worsening shortages on the horizon, compelling stakeholders to reassess supply dynamics that could lead to significant price surges.
JPMorgan has raised alarms, indicating that commercial oil inventories in the developed world could be nearing “operational stress levels” by early June. Meanwhile, Saudi Aramco has warned that global stocks of gasoline and jet fuel may dwindle to “critically low levels” just as summer demand peaks.
The International Energy Agency (IEA) has highlighted a concerning trend, reporting that oil inventories are being depleted at an unprecedented rate. As of May 8, a total of 164 million barrels have been drawn down from government and industry reserves, a pace that reflects a dangerous reduction in available supply.
“Rapidly shrinking buffers amid continued disruptions may herald future price spikes ahead,” the IEA stated in its latest monthly report. The ongoing conflict involving the U.S. and Israel against Iran, which started two and a half months ago, has fueled expectations of a swift resolution, with analysts initially predicting that the Strait of Hormuz would reopen by late May or early June. However, mounting attacks on vessels in the Persian Gulf and intensified U.S. military blockades on Iranian oil have rendered these forecasts increasingly optimistic.
As military endeavors to secure the Strait with naval forces face delays, experts express growing concerns about the implications of a prolonged closure. Hamad Hussain, a climate and commodities economist at Capital Economics, warned that if these conditions persist into late June, oil stocks could critically diminish. This scenario could lead Brent crude prices to spike to unprecedented heights, with estimates suggesting potential peaks of $130 to $140 per barrel.
Despite ongoing fluctuations, Friday saw Brent crude futures rise by more than 3%, closing at $109.26 a barrel. The market’s relative stability can be attributed to several key factors: substantial oil supplies were in transit at the onset of the conflict, strategic oil reserves have been tapped significantly, and a sharp decline in Chinese imports as the country relies on its own stockpiles.
However, there are constraints on how much oil can be released from reserves, as certain volumes are essential for maintaining storage system pressure. Furthermore, initial estimates suggest a staggering 1 billion barrels of oil may have already been lost due to current conflicts, overshadowing the IEA’s planned release of only 400 million barrels.
In light of these developments, countries in Asia are beginning to implement measures aimed at curbing oil demand, including rationing. The potential for reduced supply from the Middle East raises fears of what analysts describe as a “non-linear” adjustment in both demand and prices. This suggests that instead of a steady increase, oil prices could experience erratic spikes, resembling the abrupt upward curve of a hockey stick.
Analysts at UBS echoed these sentiments, asserting that oil inventories are nearing record lows, with available buffers depleted. As reserves dwindle further, they warned that oil prices may become subject to increased volatility, raising the specter of panic buying precipitated by intensified physical supply disruptions, particularly if the strategic waterway remains closed.
