Global oil inventories drop 460 million barrels, stress zone by late June

Brent crude has held near $100 a barrel for weeks, but the calm masks a rapid drain on global oil inventories that JPMorgan estimates will enter a stress zone by late June and approach an operational floor by September.

"Global visible crude inventories have fallen about 460 million barrels since early March, equivalent to a daily draw of 4.6 million barrels," Natasha Kaneva, head of commodities research at JPMorgan, said in a report dated June 9.

The Strait of Hormuz remains nominally blocked, with visible ship traffic at about 15% of pre-war levels. Clandestine flows — vessels transiting with transponders switched off — averaged about 2.1 million barrels a day in the second half of May, far below the 16 million barrels a day that passed through before the conflict began.

If the strait remains closed beyond June, each additional month of blockade would add about $5 a barrel to Brent in the third quarter and about $15 a barrel in the fourth quarter, as inventory buffers vanish and the market loses its cushion against supply shocks, Kaneva said.

Non-Gulf producers have ramped up output but filled only a fraction of the gap. Brazil's production exceeded analyst expectations by about 200,000 barrels a day in the first four months, Venezuela by a similar margin, and the US added 800,000 barrels a day from March through May while releasing strategic petroleum reserves at a record pace. US crude exports jumped 2.5 million barrels a day in April and a further 3 million in May. Russia underperformed by 500,000 barrels a day in April and 700,000 in May as Ukrainian drone strikes hit refineries and export terminals.

Net non-Gulf supply additions totaled about 2.1 million barrels a day in March and 2.4 million in April — against roughly 16 million barrels a day of lost Middle East supply.

Demand destruction has been faster and deeper than expected. Global oil demand fell 1.9 million barrels a day year-on-year in March, more than three times the 600,000-barrel decline analysts had forecast. The Middle East accounted for 1.4 million barrels a day of that drop as flight cancellations, stay-at-home orders and petrochemical plant shutdowns pushed gasoline demand to its lowest since early 2021 and naphtha demand near a decade low.

JPMorgan revised its April demand estimate to a decline of 3 million barrels a day and May to 4.2 million, implying demand destruction of 4.9 million and 5.6 million barrels a day respectively.

The Operational Floor Is Closer Than It Looks

The concept of "operational minimum" — the level below which pipelines, refineries and tankers cannot function — is becoming the central risk for oil markets. The global system requires about 6.8 billion barrels of system fill just to operate. With visible inventories already down 460 million barrels since March, analysts warn the world could reach tank bottoms by September if the Strait of Hormuz remains closed.

Even a swift diplomatic resolution would not prevent a crunch. Restoring normal traffic through the strait would take at least three months under the best circumstances, according to analysts. OECD countries have released about 400 million barrels from strategic reserves, with roughly half still in transit, but those reserves buy weeks, not months.

OPEC+'s decision to raise output targets by 188,000 barrels a day from July is largely symbolic while the strait remains closed. The group's actual production has collapsed to 33.19 million barrels a day in April from 42.77 million in February, according to OPEC data.

"When the Strait of Hormuz reopens, the market could move very quickly from fear of shortage to fear of surplus," said Jorge Leon, an analyst at Rystad and a former OPEC official.

The question for markets is when the psychology shifts from "is that all?" to "what if this isn't over?" Kaneva wrote. If the blockade persists into the fourth quarter, Brent could spike well above $100, with each additional month adding $15 a barrel as the last inventory buffers disappear.

This article is for informational purposes only and does not constitute investment advice.