Global oil stocks are falling at a record pace to compensate for massive supply disruptions in the Middle East and will approach crisis levels unless the Strait of Hormuz reopens.
As a result, oil and fuel prices are likely to exceed peak demand this summer, the International Energy Agency warned in its monthly update this week.
“As the turmoil continues, buffers are shrinking rapidly, which could foreshadow future price increases,” the IEA said.
The oil market has been largely immune to supply losses due to industry-held commercial inventories, government-controlled strategic stockpiles, and tankers in transit. exxon mobil CEO Darren Woods said this at the oil major’s first-quarter earnings conference.
Woods said these stocks cushioned the impact of the turmoil in March and April. But the CEO said commercial inventories will eventually fall to a level where they can continue to serve as a source of supply.
“As something like this happens and the Straits remain closed, we expect prices to continue to rise in the market,” Woods said.
Stockpiles near record lows
Inventories stood at more than 8 billion barrels at the end of February, the highest level in nearly a decade, Swiss bank UBS estimated in a report on Tuesday. By the end of April, inventories had fallen to 7.8 billion barrels, according to UBS analysts.
If demand remains the same month-on-month, inventories will approach a record low of 7.6 billion barrels by the end of May, UBS analysts said. JPMorgan analysts said in an April 30 note that a decline in inventories to that level would put stress on the supply chain.
Billions of barrels of inventory may sound like a lot, but in reality, only about 800 million barrels are available without straining the system, JPMorgan analysts said. The rest is needed to keep pipelines and tanks filled to a minimum and to keep the supply chain running efficiently.
“Like blood pressure in the human body, the problem is circulation,” said Natasha Kaneva, head of global product strategy at JPMorgan. “The system doesn’t fail because there’s no more oil; it fails because there’s not enough work in the circulation network.”
JPMorgan predicted that if Hormuz Island were still closed, oil inventories would fall to an extremely low level of 6.8 billion barrels by September. Rapidan Energy forecasts that product inventories will reach crisis levels even sooner, in July or August.
In a May 7 article, Rapidan analysts said the global economy would “stagnate as critical transportation infrastructure becomes unable to obtain fuel at any price.”
But analysts said it was highly unlikely that inventories would reach such a seriously low level. Instead, oil and product prices will rise to suppress demand, causing a “severe economic contraction.”
“That is likely to happen by Q3 2026,” Rapidan analysts said.
