Uche Cecil Izuora
Energy policy analysts have warned of an extended period of severe energy flow disruptions as the world is running out of oil.
They expressed concern of likelihood of a crude shortage on a global scale which is becoming increasingly realistic with each day that the Strait of Hormuz remains almost completely blocked. Analysts are no longer modeling for a swift end to the war between the United States, Israel, and Iran.
Kpler, reported earlier this month the cumulative loss of oil supply in the Middle East since February 28 had hit 782 million barrels as of May 8 and was on track to expand to 1 billion barrels by the end of the month. In daily output terms, the picture looks no better.
Saudi Arabia is losing over 3 million barrels daily, Iraq is producing 2.88 million barrels daily less, and Iran is at 1.69 million barrels daily lower output, while Kuwait has suffered a decline of 1.75 million barrels daily.
With so much production offline, the most sensible thing to do is tap reserves. Estimated at record highs, the world’s oil stocks were cited as a big reason for predictions of a severe glut that could exceed demand by almost 4 million barrels daily, according to the International Energy Agency (IEA). But that was before the war began.
Now, the IEA is warning that demand for oil will exceed supply this year.
In its latest monthly report, the IEA said it expected global oil supply to fall by some 3.9 million barrels daily over the current year which is a lot less than what the actual current supply loss is from the Middle East.
The IEA estimates that loss at 10.5 million barrels daily. Yet while supply falls by 3.9 million barrels daily which may turn out to be an optimistic scenario—demand would only fall by 420,000 barrels daily, according to the international authority on energy.
“You can only decrease consumption so much, and when inventories run out, they are going to run out,” Ellen Wald, senior fellow at the Atlantic Council’s Global Energy Center, told the Wall Street Journal this week. “At some point the market is going to collide and prices are going to shoot up.”
This echoes the warning that Aramco’s chief executive issued earlier in the month, saying global onshore inventories of fuels were depleting at record speed. These inventories are “the only buffer that is available today”, Amin Nasser said, as quoted by the Financial Times, but they are “materially depleted”.
JP Morgan’s commodity analysts also joined the chorus of warnings, saying that by next month, commercial oil inventories in, per the FT, the developed world could “approach operational stress levels”, meaning supply loss could become a lot less manageable than it is now.
“Our conclusion is that one way or another the strait reopens in June,” JP Morgan’s Natasha Kaneva said, as an end to the war would be the only way the world avoids the shortage scenario.
If that does not happen, “The next phase of this shock may look less like a traditional crude spike and more like a refining and end-user fuel crisis,” the bank’s head of global commodities strategy said, noting that only a “clear, credible announcement, ratified and confirmed by both sides” would calm markets.
Adding to the pessimism, Aramco’s Nasser pointed out in his recent comments that traders may be overestimating the availability of oil in storage. Not all of the barrels that are counted as being in storage are actually accessible, he said. In fact, only a fraction of it is accessible. “The rest is locked up in pipeline fill, minimum tank levels and other day-to-day operational constraints.” There are also limits to how much oil one can draw from storage on a daily basis. “In Europe and the US, the maximum you can pull out from there is 2mn barrels a day,” Aramco’s chief executive said.
According to Kpler, inventory drawdowns are moderate for now.
The firm estimated cumulative draws from onshore storage at 60 million barrels since late March, which leaves 3 billion barrels still in storage or whatever fraction of that volume is accessible.
Yet the longer the supply outage in the Middle East continues, the more barrels would need to be drawn from storage, while there is no supply to replenish them in a timely manner.
In other words, the storage cushion will get thinner if the war continues beyond this month.