Drawing down the world’s oil inventories is reducing buffers that were built up before war broke out in the Middle East. In the first two months of the conflict, almost 100 million barrels of inventory were burned through in just the commercial inventory of oil and liquids.
Oil on the water when the war started and the release of strategic reserves provided a cushion against what is now a historic supply shock that involves the loss to market of more than 1 billion barrels.
In addition, increased oil exports from the United States and diminished demand from China have mitigated conditions on the margin.
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Still, as these buffers dissipate, the world’s economies become more vulnerable to further disruption should oil and refined products not flow freely through the Strait of Hormuz soon.
The baseline assumption of investors and much of the public is that the strait will reopen soon.
If the strait remains effectively closed, though, we think that conditions for another round of price increases for oil will start in early June and will intensify with each passing week.
