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.”
World Oil Inventories Are Falling at a Record Pace
Total visible oil inventories, in billions of barrels
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. 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.
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. “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.”
Oil Prices Rallied on Biggest-Ever Supply Shock
If the Strait of Hormuz doesn’t reopen by early June, some Asian countries will face a macroeconomic shock because of the shortage of gasoil, he predicted, while Europe may have one more month before the situation becomes difficult to manage. To be sure, some analysts and traders say that the stress points are lower than what JPMorgan estimates, meaning that the industry could have a bigger buffer, while further demand loss would also help reduce the pressure on the system. The JPMorgan estimates assume demand destruction of 5.6 million barrels a day for June through September.
Diesel — the lifeblood of the global economy — is also facing a crunch. Countries hit hardest are those with limited domestic crude production and refining capacity, said Xavier Tang, a senior market analyst at Vortexa Ltd. “Northeast Asian countries such as China, Japan and South Korea hold ample crude and product stocks in their storage tanks,” said Tang. “Vietnam, Philippines are in a more dire situation;
Europe and Jet Fuel
In Europe, the critical product is jet fuel. Inventories in independent storage at the Amsterdam-Rotterdam-Antwerp hub have plunged a third since the war started to a six-year low, according to Insights Global, which gets data from terminal operators.
Inventories Drop in Europe’s Oil Trading Hub
Stockpiles of jet fuel/kerosene held in independent storage
Source: Insights Global
“Since February, we have seen a steady drop in jet fuel stocks,” said Lars van Wageningen, research and consultancy manager at Insights Global. “Other regions like Asia and Australia also need to source this product, so everybody’s scrambling for whatever jet fuel they can get — with a cost.” While there’s enough supply in the short-term, summer demand could cause stocks to dry up in five months, he said. The UK, Germany and France are most vulnerable because of heavy traffic and insufficient local production.