Global Oil Stocks Face Fastest Drawdown Since the 1979 Crisis
Emergency and commercial oil inventories are being depleted at a pace unseen since the 1979 Iranian revolution as the U.S.-Iran war drags on, raising doubts about how long global buffers can absorb a supply gap Saudi Aramco says is running as high as 11 million barrels a day.
MONTREAL (Oil Monster): As the U.S.-Iran war drags on with no end in sight, oil traders and policymakers are grappling with a critical question: are global oil stocks enough to offset what could become the biggest supply disruption on record?
The answer is far from clear, depending not only on how much oil remains in storage, but also on how much of it can actually be released.
What Readers Should Know
- Saudi Aramco estimates the world has lost 2.6 billion barrels of oil since the war began — the largest cumulative supply disruption on record apart from the 1979 Iranian revolution.
- IEA government-held stocks of 0.9 billion barrels can cover the estimated 5-million-bpd supply gap for about 180 days; commercial stocks cannot be ordered released.
- The U.S. Strategic Petroleum Reserve has fallen to its lowest level since January 1983, with only about 200 million barrels considered accessible.
- Global diesel and jet fuel stocks are at the bottom of their five-year range after strikes on Middle Eastern and Russian refineries.
- China's estimated 1.7 billion barrels of crude reserves could cover its pre-war Hormuz-linked imports for almost a year, among the most comfortable positions of any major economy.
Why the Current Disruption Is So Severe
How long reserves would last can only be ascertained by figuring out the size of the current disruption.
The head of Saudi Aramco believes the world has lost 2.6 billion barrels of oil since the start of the war, making it the largest supply disruption ever in cumulative terms apart from the 1979 Iranian revolution, according to Reuters calculations.
That amounts to a massive 25 days of global consumption based on pre-war global oil demand of 103 million barrels per day.
However, China cut demand in recent months, and that means the world is consuming less oil.
Most analysts believe the daily supply gap to cover demand amounts to 5 million bpd, even though Aramco says the world is losing 11 million barrels of supply from the Gulf daily. The gap might have widened in July after Ukrainian drones shut the Kazakh CPC pipeline, which pumps 1.8 million bpd.
How Long Emergency Reserves Would Last
The West's energy watchdog, the International Energy Agency, announced in March a release of 400 million barrels from emergency reserves and says the global economy still has substantial stocks.
The IEA was created in 1974 in response to another major oil crisis — the Arab oil embargo.
IEA stocks consist of government-held stocks and commercial stocks, together standing at 1.5 billion barrels — enough to cover the current estimated supply gap of 5 million bpd for 300 days.
However, the IEA cannot order the release of commercial stocks, such as those held by refiners for operational reasons. That leaves only 0.9 billion barrels in government-held stocks — enough to cover the supply gap for 180 days.
Why U.S. Reserves Are as Low as the Reagan Era
The IEA does not disclose the precise make-up of stocks. Of its remaining government-held stocks, one-third is held in the United States.
Crude oil stocks in the U.S. Strategic Petroleum Reserve fell to the lowest levels since January 1983, when Ronald Reagan was president.
The U.S. Government Accountability Office warned in May that the SPR's infrastructure was deteriorating fast and that a quarter of reserves is no longer available. This implies that over 100 million barrels have become impossible to release, according to analysts from Rapidan Energy.
If the U.S. has only 200 million barrels of accessible SPR stocks left, they can cover just 40 days of the current supply gap.
How the Diesel and Jet Fuel Shortage Is Building
A new IEA release is unlikely, as many countries have limited stocks left, said Christian Egeland from Energy Aspects.
The depletion of inventories has reduced the buffer against supply shocks, leaving the oil market vulnerable to sharp price rises, said Hamad Hussain from Capital Economics.
Global stocks of diesel and jet fuel are currently at the bottom of their five-year range, according to Morgan Stanley. The wars damaged Middle Eastern and Russian refineries and have hit diesel and jet fuel particularly hard, said Survo Sarkar of DBS Bank.
Why China Could Withstand the Crisis Longer
Total global oil stocks — including all types such as commercial stocks, the U.S. SPR, Chinese stocks and stocks on water — look fairly comfortable, according to the IEA.
But a big chunk of those are not real supply buffers, as stocks on water, for example, often represent oil and fuel already sold and in transit.
China doesn't disclose its reserves. Energy Aspects estimates China held nearly 1.7 billion barrels of crude in July, though estimates between consultancies vary from 1.0 billion to 1.7 billion. In addition, there are unknown quantities of fuel and petrochemicals held in inventories.
With a reserve of 1.7 billion barrels, China could cover its pre-war imports through the Strait of Hormuz — about 5.5 million barrels per day — for almost a year, one of the most comfortable levels among major economies alongside Japan.
How much oil has the world lost since the war began?
How long can IEA government stocks cover the supply gap?
How low has the U.S. Strategic Petroleum Reserve fallen?
Why are diesel and jet fuel stocks under particular strain?
Which major economy is best positioned to weather the crisis?
Courtesy: www.reuters.com