Iran's War Drains Global Oil Stocks at an Unprecedented Rate

SadaNews - The world is rapidly depleting oil stocks at a record pace, as Iran's war strangles flows from the Arabian Gulf, eroding the very reserves designed to shield against supply shocks.

The rapid contraction in inventories indicates that the risk of sharp price spikes and a more acute supply shortage is closer than ever, reducing the options available to governments and industries to mitigate the impact of losing over one billion barrels of supplies, following nearly two months of near-total closure of the Strait of Hormuz. Moreover, the sharp depletion will also mean that the market will remain vulnerable to future disruptions for longer even after the conflict ends.

Morgan Stanley estimates that global oil stocks have fallen by approximately 4.8 million barrels per day between March 1 and April 25, far exceeding the previous record for quarterly draws in data collected by the International Energy Agency. Crude oil accounts for about 60% of the decline, while refined fuel types make up the remainder.

Most importantly, the system also needs a minimum amount of oil, meaning that the "operational minimum" is reached long before inventories actually hit zero, according to Natasha Kaneva, head of global commodity research at JPMorgan Chase & Co.

Kaneva stated: "Inventories represent the first line of defense for the global oil system." But she added: "Not every barrel is drawable."

There are some signs that the pace of draws may have slowed somewhat in recent days, according to Goldman Sachs Group, which pointed to weak demand from China, the world's largest oil importer, leaving more available for other buyers. However, global visible oil stocks are already close to their lowest levels since 2018, according to the bank.

Estimating global inventories involves a mix of art and science. A large part consists of strategic reserves of crude and fuel controlled by governments, either directly or by mandating the sector to maintain a level of reserves that can be released when needed, or a mix of both. However, there is also a vast amount in commercial stocks, which are held by oil producers, refiners, traders, and distributors within their normal business operations.

The most urgent pressure points are concentrated in a handful of Asian countries reliant on fuel imports, with traders citing Indonesia, Vietnam, Pakistan, and the Philippines as the biggest concerns, as they might reach critical supply levels within just one month. In contrast, the larger economies in the region, particularly China, are still in a comfortable position for now.

However, aviation fuel stocks in Europe are also being rapidly depleted as the summer holidays approach, with some analysts expecting critical levels as soon as June.

Operational Minimum

Kaneva from JPMorgan warns that OECD inventories could reach "operational stress levels" in early next month if the strait does not reopen, and "minimum operational floors" by September. This is the point at which the world reaches the bare minimum quantities of oil necessary for pipelines, storage tanks, and export stations to operate properly.

The United States, which has become the world's supplier of last resort, has already drawn its domestic crude and fuel stocks down below historical averages with rising exports. U.S. crude inventories, including the nation's strategic petroleum reserve, have fallen for four consecutive weeks, according to government data. Distillate stocks in the U.S. were at their lowest level since 2005 last weekend, while gasoline stocks hovered near their lowest seasonal levels since 2014.

Predictions for Accelerating Draws from Storage Tanks

While oil companies in the U.S. have begun to increase production, executives have warned that inventories are likely to continue to decline in the short term.

Even if the waterway is reopened, it is unlikely that Gulf production and shipping will return to normal levels anytime soon, meaning that fuel users may be forced to withdraw at a deeper pace from storage tanks.

The conflict has already caused spikes in spot crude prices and main fuel types, threatening to increase inflation and intensify the risk of a global recession. India is facing a liquefied petroleum gas shortage, leading airlines to cancel flights. Meanwhile, drivers in the United States are dealing with steeply rising gasoline costs.

Demand Destruction Amid Rising Prices

Global oil consumption has already sharply declined due to supply disruptions and rising prices. However, as inventories approach critical levels, analysts, traders, and executives warn that prices could spike to a level that chokes off a much greater amount of demand in order to balance the market.

Emer Bonner, CFO at Chevron, told Bloomberg TV on May 1: "A significant amount of inventories and excess capacity has already been depleted." She added: "We will start to see some countries reliant on imports possibly facing a critical shortage as we enter the June-July time frame."

Threat to Asian and European Economies

Frederic Lasser, head of research at energy trading company Gunvor Group, said: "What concerns me most regarding places facing an imminent shortage is gasoline in Asia, as countries like Pakistan, Indonesia, or the Philippines are likely to be the first to face problems with running out of fuel from their tanks."

He predicted that if the Strait of Hormuz does not reopen by early June, some Asian countries could face a full economic shock due to a lack of heating oil, whereas Europe may have an additional month before the situation becomes difficult to manage.

However, some analysts and traders say the pressure points may be less severe than JPMorgan estimates, suggesting that the sector might have a larger buffer and that further demand loss could also help alleviate stress on the system. JPMorgan estimates assume demand destruction of 5.6 million barrels per day from June to September.

The Situation in Asia

While Asia is the most exposed to losing Middle Eastern oil, inventories in major economies have largely held up, with China's and South Korea's levels being comfortable enough that they are considering resuming refined product exports that had been restricted earlier. Inventories at the fuel storage hub in Singapore have recently been above seasonal averages. Crude inventories in China remain robust, as spatial analytics firm Kayrros estimates they have actually increased during the war.

The energy transition may also mean that some countries will need to store less fuel in the future. Gasoline and diesel may not be as critical in countries like China, which has vastly shifted its fleet of cars and trucks to electric power.

Antoine Halff, co-founder of Kayrros, noted that oil inventories in the Asia-Pacific region outside China have been the most affected, having fallen by about 70 million barrels since the conflict began.

India and Japan

Kayrros indicated that inventories in Japan and India are at seasonal lows of at least 10 years, down by 50% and 10% respectively since the war began. Supplies in the region of naphtha and liquefied petroleum gas, both used in petrochemicals, have been particularly affected, according to Goldman Sachs.

Some Asian officials say inventories are sufficient, at least for now. The Pakistani Minister of Oil stated in late April that the country has commercial reserves of refined products sufficient for about 20 days. The Indian Ministry of Oil on May 3 confirmed that refineries have adequate crude stocks, although state refineries privately acknowledged they have drawn down a significant amount, without providing details.

Diesel Shortage Threatening Vietnam and the Philippines

Diesel, the lifeline of the global economy, is also under pressure. Xavier Tang, senior market analyst at Vortexa, noted that the most affected countries are those with limited domestic crude production and refining capacity.

Tang stated: "Northeast Asian countries like China, Japan, and South Korea have ample crude and products inventories in their storage tanks." He added: "Vietnam and the Philippines are in a more difficult position."

Europe and Aviation Fuel

In Europe, the critical product is aviation fuel.

Stocks at independent storage facilities in the Amsterdam-Rotterdam-Antwerp hub have dropped by a third since the onset of the war to their lowest level in six years, according to Insights Global, which obtains data from terminal operators.

Lars van Wiggingen, head of research and consulting at Insights Global, stated: "Since February, we have seen a steady decline in aviation fuel inventories." He added: "Other regions like Asia and Australia also need to access this product, so everyone is racing to secure any available aviation fuel, but at a cost."

He noted that while there are sufficient supplies in the short term, summer demand could drain inventories in five months. He pointed out that the UK, Germany, and France are the most at risk due to high traffic density and inadequate domestic production.

Strategic Inventories

Governments have already committed to drawing a record 400 million barrels of oil from emergency reserves in a coordinated move by the International Energy Agency.

However, the United States has only utilized about 79.7 million barrels of the 172 million barrels it committed to release, as it walks a fine line between providing enough supplies to support global markets and pushing oil inventory closer to depletion. The reserve is already set to drop to its lowest level since 1982 if the administration completes the full release.

Germany is reoffering crude oil and aviation fuel that the market did not use when it was previously offered, and it will take further action if shortages occur, according to the Ministry of Economy.

Governments are facing the dilemma that releasing more inventories to curb prices will only lead to further erosion of the reserve margin.

Additional Pressure on the Market After Reopening Hormuz

Looking further ahead, the steep decline in global inventories will create additional pressure on the market once the strait is reopened, as governments and companies rush to refill them.

Willy Chiang, CEO of Plains All American Pipeline, stated on a Friday earnings call: "We expect this environment of reducing inventories to continue over the next several months, which will ultimately drive a phenomenon of restocking in the longer term." He added: "Post-war, we wouldn't be surprised to see several countries refilling their strategic oil reserves above pre-war levels, effectively creating an additional layer of demand in the future."