Rapidly shrinking stockpiles mean that the risk of even more extreme price spikes and shortages
A storage
facility at Tanjung Priok Port in Jakarta, Indonesia.
The world
has burned through oil inventories at a record speed as the Iran war throttles
flows from the Persian Gulf, eating into the very buffer that protects against
supply shocks.
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.
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“Inventories
are acting as the shock absorber of the global oil system,” she said. But “not
every barrel can be drawn.”
There are
some signs that the drawdown may have slowed slightly in recent days, according
to Goldman Sachs Group Inc., which pointed to weaker demand from China, the
world’s top oil importer — leaving more available for other buyers. Still,
global visible oil stocks are already close to their lowest since 2018, the
bank said.
Estimating
global inventories involves both art and science. A large part are strategic
caches of crude and fuel controlled by governments, either directly or by
requiring the industry to maintain a level of reserves that can be released
when needed, or a combination of the two. But there’s also a huge amount in
commercial stockpiles — the inventories of oil producers, refiners, traders and
distributors held as part of normal business operations.
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.
JPMorgan’s
Kaneva warns that inventories in the Organisation for Economic Co-operation and
Development could reach “operational stress levels” early next month, if the
strait doesn’t reopen, and then “operational minimum” floors by September.
That’s the point when the world hits the bare minimum amounts of oil needed for
pipelines, storage tanks and export terminals to function properly.
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.
While
America’s oil drillers have started to turn the taps on, executives have warned
that inventories are likely to keep falling in the short-term.
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.
Global oil
consumption has already dropped sharply, in part because of supply disruptions,
and in part because of higher prices. But as inventories get closer to critical
levels, analysts, traders and executives warn that prices will need to spike to
a level that chokes off significantly more demand in order to balance the
market.
“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.”
“Top of my
mind in terms of places facing imminent shortage is gasoline in Asia, with
countries like Pakistan, Indonesia or the Philippines likely to be the first to
face issues with tank bottoms,” said Frederic Lasserre, head of research at
energy trader Gunvor Group.
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.
While Asia
has been the most exposed to the loss of Middle Eastern oil, stockpiles in key
economies are largely holding up, with China’s and South Korea’s levels so
comfortable that they’re considering resuming refined-product exports that were
earlier curbed. Stocks in the fuel-storage hub of Singapore were recently above
seasonal averages. China’s crude inventories remain robust, with geospatial
analytics firm Kayrros estimating they’ve actually risen during the war.
The energy
transition may also mean that some nations need to store less fuel going
forward. Gasoline and diesel may not be as crucial in nations like China, which
has massively electrified its fleet of cars and trucks.
Oil
inventories in the Asia-Pacific region outside of China have been hit hardest,
falling by about 70 million barrels since the conflict began, Kayrros
co-founder Antoine Halff said.
Kayrros said
stockpiles in Japan and India are at an at least 10-year seasonal low, down 50%
and 10%, respectively, since the war began. The region’s supplies of naphtha
and LPG, both used for petrochemicals, have been particularly hit, according to
Goldman Sachs.
Some Asian
officials say stockpiles are sufficient, at least for now. Pakistan’s petroleum
minister in late April said it has roughly 20 days of commercial reserves of
refined products. India’s oil ministry said on May 3 that refineries have
adequate crude inventories, though state-run refiners privately acknowledged
that they’ve burnt through a sizable amount, without elaborating.
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.”
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.
“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, he said.
Strategic
stockpiles
Governments
have already pledged to deploy a record 400 million barrels of oil from
emergency reserves in a move co-ordinated by the IEA.
However, the
US has only utilized about 79.7 million barrels of the 172 million it promised
to release, as it it walks a fine line between providing enough supply to
sustain global markets and pushing the oil store further toward depletion. The
reserve is already poised to fall to its lowest level since 1982 if the
administration completes the full release.
Germany is
re-offering crude and jet fuel that wasn’t taken by the market when previously
offered, and will take further measures if there’s a shortage, the economy
ministry said.
Governments
face a dilemma that if they release more stockpiles to rein in prices, it would
only further erode the buffer.
Looking
further ahead, the sharp reduction in global stockpiles will mean added
pressure on the market once the strait reopens, as governments and companies
rush to replenish them.
“We expect
this destocking environment to continue over the next number of months and
ultimately drive a restocking phenomenon longer-term,” Plains All American
Pipeline LP Chief Executive Officer Willie Chiang said on an earnings call
Friday. “Post-war, we would not be surprised to see several countries restock
their SPRs above pre-war levels, essentially creating an additional layer of
demand into the future.”
https://nationalpost.com/news/world/iran-war-is-draining-worlds-oil-buffer-at-an-unprecedented-pace
The gathering, officially dubbed a “think tank” meeting, was closed to the media. Barack Obama gave the keynote address, and the assembly of political leftists took place as the U.S. and Canada remain at odds over differing worldviews and an economic dispute surrounding the USMCA trade agreement.
