Global oil inventories are dropping at a record pace as the Strait of Hormuz remains effectively closed. Despite expectations for a resolution by late May, Brent crude futures rose 3% to $109.26 a barrel on Friday after diplomatic efforts failed to reopen the waterway. The International Energy Agency reported that governments and industry have already released 164 million barrels to offset the disruption, but these buffers are shrinking.
Supply buffers near exhaustion
Analysts at JPMorgan and UBS warn that commercial oil inventories in the developed world could approach operational stress levels by early June. While record releases from strategic reserves and a drop in Chinese imports have moderated price spikes so far, the daily flow of releases is limited by the physical pressure required to maintain storage systems.
- Inventory depletion. An estimated 1 billion barrels of oil have been lost, significantly outweighing the IEA's planned 400-million-barrel release.
- Critical shortages. Saudi Aramco warned that global stocks of gasoline and jet fuel could hit critically low levels before the summer travel season.
- Economic impact. Capital Economics estimates that if the current depletion rate continues, Brent could hit $130 to $140 a barrel next month.
The risk. Economists are now monitoring for a "non-linear" price adjustment, where oil costs could go parabolic rather than following a steady upward trend. Some Asian countries have already initiated rationing measures as physical dislocations intensify. If the U.S. military cannot reopen the strait and Iranian attacks on ships in the Persian Gulf continue, the market faces the risk of panic buying as physical supplies vanish. Brent futures at $140 remains the threshold for more damaging cuts to global oil demand.
