Analysts Warn Oil Stocks Near Operational Minimums as Hormuz Stays Shut

Oil markets are heading toward a supply cliff if the Strait of Hormuz stays closed much longer, according to analysts cited by Fortune. JPMorgan estimates that inventories in the Organization for Economic Cooperation and Development’s member countries will reach “operational minimums” between May 9 and May 30, at which point prices would rise “exponential rather than linear,” the magazine reported.

As of Friday, U.S. benchmark West Texas Intermediate crude traded around $102 a barrel and Brent, the international benchmark, above $108, Fortune reported, with prices for physical delivery higher than futures contracts. The Boston Globe reported on Thursday that Brent had touched about $120 during the week, up from about $70 in February, before the war with Iran began.

Fortune described two scenarios. In the first, which traders call “tank bottoms,” Western stockpiles run dry. Frederic Lasserre of the commodity trader Gunvor Group said that if the strait stays closed another month, markets will run out of stockpiles. Amrita Sen of Energy Aspects predicted that stockpiles will be exhausted by the end of June if the war drags on: “We will just not have any buffers.” Paul Sankey of Sankey Research said the next few months would be “an ongoing, absolute disaster” even if the strait reopened immediately.

In the second scenario, “tank tops,” Iran’s own storage fills. The U.S. naval blockade has stopped Iranian exports, Fortune said, and Iran’s storage could be full within about a month at current production. Producers who cannot store or sell output would have to cut it sharply, risking permanent damage to oilfields, the report said. It added that Iran is proactively reducing crude output, has reactivated old tankers as floating storage and has explored shipping supplies by rail to China.

U.S. supplies are already drawing down. Fortune said U.S. oil and product reserves fell by a combined 52 million barrels over four consecutive weeks. Saudi Arabia and the United Arab Emirates have used alternative export routes that bypass Hormuz, and the United States, Japan and Europe have coordinated releases from strategic reserves. Exxon Mobil chief executive Darren Woods said the market has not yet felt the full impact: “There’s more to come if the strait remains closed.”

Production at home is unlikely to fill the gap quickly. In a Dallas Federal Reserve survey of oil and gas executives, Fortune reported, respondents signaled that supply will not change much. Gulf producers such as Kuwait and Iraq, whose production has been shut in during the war and which lack easy bypass routes, risk long-term damage to their oil capacity, the magazine reported.

The squeeze comes as traffic through the strait remains very low. CBS News reported, citing the Royal Navy, that shipping through the waterway has fallen by more than 90 percent since the conflict began. The Boston Globe reported on Thursday that the University of Michigan’s consumer sentiment index fell to a record low in April. Fortune said futures had not reached the worst-case scenarios of $150 to $200 a barrel.