Renewed hostilities between the US and Iran, including Iranian strikes on Gulf energy infrastructure and US retaliatory strikes, have pushed Brent crude above $90 a barrel. This resurgence of conflict has revived fears of a wider regional conflict and the potential for a deeper oil supply crisis. Goldman Sachs has stated its $100 Brent scenario is "back in play" following Iran's declaration that the Strait of Hormuz, a critical shipping route for approximately 20% of the world's crude, is closed.
Global oil inventories, including emergency stockpiles, have been significantly drawn down, leaving limited buffers to absorb further supply disruptions. According to the International Energy Agency (IEA), global observed oil inventories fell by 360 million barrels between March and May. The US Strategic Petroleum Reserve has fallen to its lowest level since 1983, and overall global stockpiles, excluding China, are at a record low, according to JPMorgan Chase & Co. Analysts warn that the world has "little room for error" if the situation in the Strait of Hormuz is prolonged or worsens further.
The market for refined fuels is even tighter than crude. US gasoline stocks are at their lowest for this time of year since 2012, and middle distillate fuels like diesel are considerably below their five-year average. Refineries in the Middle East and Asia have reduced operating rates due to crude flow disruptions through Hormuz, further exacerbating the fuel supply crunch. Christopher Haines of Energy Aspects Ltd. notes that "Refined product markets are even tighter than crude."
Despite the current volatility, there are still some emergency stockpiles available, though they are not endless. The IEA states that its member countries have released almost three-quarters of the planned emergency oil reserves. Germany still holds millions of unsold barrels from the first tranche and plans to refill diesel reserves, while Japan has been restocking commercial petroleum reserves. However, the ongoing attacks on shipping in the Strait of Hormuz and the significant depletion of strategic reserves globally suggest a high risk of sustained higher oil prices and potential economic impacts, including higher inflation and increased interest rates.
