Iran Conflict Accelerates Global Oil Reserve Depletion at Record Rate

Global Oil Inventories Plummet to Record Lows Amid Iran War

The world has burned through oil inventories at an unprecedented rate as the Iran war throttles flows from the Persian Gulf, eroding the buffer that protects against supply shocks. The rapidly shrinking stockpiles have raised the risk of extreme price spikes and shortages, leaving governments and industries with limited options to cushion the impact of the loss of over a billion barrels of supply.

Morgan Stanley estimates that global oil stockpiles dropped by approximately 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, while refined fuels make up the rest.

The depletion of global oil stockpiles has led to operational stress levels, with the Organisation for Economic Co-operation and Development (OECD) facing a critical shortage if the Strait of Hormuz does not reopen by early June. JPMorgan Chase & Co.'s head of global commodities research, Natasha Kaneva, warns that inventories in the OECD could reach operational minimum floors by September, the point at which the world hits the bare minimum amounts of oil needed for pipelines, storage tanks, and export terminals to function properly.

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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.

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 due to supply disruptions and higher prices. However, 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 to balance the market.

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Chevron Corp.'s Chief Financial Officer, Eimear Bonner, has warned that a lot of the inventory and spare capacity has been depleted already, while Gunvor Group's head of research, Frederic Lasserre, predicts that some Asian countries may face a macroeconomic shock due to the shortage of gasoil by early June.

Governments have already pledged to deploy a record 400 million barrels of oil from emergency reserves, coordinated by the International Energy Agency (IEA). However, the US has only utilized about 79.7 million barrels of the 172 million it promised to release, as it walks a fine line between providing enough supply to sustain global markets and pushing the oil store further toward depletion.

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. Plains All American Pipeline LP's Chief Executive Officer, Willie Chiang, expects this destocking environment to continue over the next number of months and ultimately drive a restocking phenomenon longer-term.