Global oil inventories rapidly decreasing; possibility of oil crisis in H2?

International oil prices have remained lower than expected and less volatile, even amidst supply shocks following a regional conflict. This stability is attributed to ample global oil inventories. However, the speed at which these reserves are diminishing has accelerated recently, leading to projections of an unavoidable oil shortage in the latter half of the year.

Production from five oil-producing nations in the Gulf region, whose crude exports were disrupted by the conflict, is estimated to have decreased by approximately 11 million barrels per day during the conflict period (March-May). Consequently, global oil supply is estimated to have fallen by over 10% in the past three months. While West Texas Intermediate (WTI) futures briefly surged to $112.95 per barrel in early April, they later fluctuated between $80 and $100 before retreating to around $90 by late May. This is lower than the peak of $120.90 in early June 2022 during the Russia-Ukraine war and significantly below the initial market expectation of up to $200, which assumed a blockade of the Strait of Hormuz.

“

This supply shock will be greater than the two oil shocks of the 1970s and the natural gas shock after the Ukraine war.

The primary reason for the relatively stable oil prices, contrary to concerns raised by the International Energy Agency (IEA) chief about a potential shock larger than the 1970s oil crises or the post-Ukraine war natural gas shock, is the substantial global oil reserves built up before the conflict. As of late February, observable global oil stocks stood at 8.2 billion barrels, equivalent to 78.5 days of global demand, marking a five-year high. Although stocks decreased to 7.95 billion barrels by late April due to the Strait of Hormuz blockade, this still represented 76.1 days of global demand. Estimates from the US Energy Information Administration (EIA) suggest global oil inventories were around 7.5 billion barrels by late May, sufficient for over 70 days of global demand, well above the 30-65 day range considered adequate by international organizations.

“

The speed of inventory reduction, which has been unprecedented since March, is continuing.

The critical issue, however, is the unprecedented rate of inventory decline since March. According to the EIA, global oil inventories decreased at an average daily rate of 5.27 million barrels in March, 8.62 million barrels in April, and a record-breaking 9 million barrels in May. The daily reduction in May alone is equivalent to 1.6 times India's daily oil consumption, the world's third-largest consumer. The cumulative decrease of 700 million barrels from March to May represents 1.9% of global demand for the entire previous year. At this pace, concerns are mounting that a global oil inventory crisis will be difficult to avoid in the second half of the year.

While the decline in oil stocks is more pronounced in Asian emerging markets like China and Japan, US crude inventories actually increased by 0.5% to 442 million barrels as of May 22 compared to before the conflict. Europe's inventory situation is also considered less severe than Asia's due to diversified imports. Regarding demand, projections that global oil consumption would significantly decrease due to the conflict, thereby offsetting supply shocks, have not yet been confirmed. The Korea Center for International Finance suggests that the possibility of 'demand destruction' is low, with the IEA forecasting a decrease of 420,000 barrels per day in global oil demand this year, while OPEC anticipates an increase. US oil demand, as of May 22, stood at 20.19 million barrels per day, a 2.5% increase compared to the five-year average.

“

As oil inventories, particularly for transportation fuels like diesel, are rapidly being depleted, they are expected to become a potential threat triggering an oil crisis in the second half of the year.