Global oil stocks are falling at a record pace to offset the sharp supply disruption in the Middle East and will approach critical levels if the Strait of Hormuz does not reopen.
As a result, rising oil and fuel prices are likely ahead of this summer’s peak demand, the International Energy Agency warned this week in its monthly update.
“Rapidly diminishing safety margins amid persistent disruptions could herald future price increases,” the IEA said.
The oil market has not felt the full impact of the loss of supply due to commercial stocks held by industry, strategic reserves controlled by governments and tankers in transit, Exxon Mobile said CEO Darren Woods during the oil major’s first-quarter earnings call.
These stocks softened the impact of the March and April disruptions, Woods said. But commercial inventories will eventually fall to levels where they can no longer serve as a source of supply, the CEO said.
“We anticipate that as this happens and the Strait remains closed, we will continue to see an increase in prices in the market,” Woods said.
Stocks near record lowsStocks reached their highest level in a decade at the end of February, at just over 8 billion barrels, Swiss bank UBS estimated in a report published Tuesday. By the end of April, stocks had fallen to 7.8 billion barrels, according to UBS analysts.
Stockpiles will reach a record 7.6 billion barrels by the end of May if demand remains the same month-to-month, UBS analysts said. A drop in inventories to that level would strain the supply chain, JPMorgan analysts said in an April 30 note.
Billions of barrels in storage may sound like a lot, but the reality is that only about 800 million barrels are available without straining the system, JPMorgan analysts said. The remainder is needed to keep pipelines and tanks filled to minimum levels so the supply chain operates efficiently, they said.
“Like blood pressure in the human body, the problem is circulation,” said Natasha Kaneva, head of global commodities strategy at JPMorgan. “The system does not fail because the oil disappears, it fails because the circulation network no longer has sufficient working volume.”
Oil inventories would fall to a critical level of 6.8 billion barrels by September if Hormuz was still closed at that time, JPMorgan forecasts. Product inventories would reach critical levels earlier in July or August, Rapidan Energy forecast.
The global economy would “shut down, with critical transportation infrastructure unable to secure fuel at any price,” Rapidan analysts said on May 7.
But it is very unlikely that stocks will reach these extremely low levels, analysts say. Instead, prices of oil and petroleum products will rise to reduce demand, leading to “a severe economic contraction.”
“This is expected to happen before 3Q26,” Rapidan analysts said.