Key Takeaways
- Brent crude oil prices have surged above USD 100 a barrel as tensions in the Middle East escalate.
- With energy flows disrupted again, analysts and oil traders warn that there are no longer substantial oil stockpiles to fall back on.
- That could push oil prices further and reignite inflation fears.
As oil prices continue surging, analysts and oil traders have warned of a worse energy supply crunch than the one at the start of the Iran war as essential stockpiles run dangerously thin. Brent crude oil futures climbed above USD 100 this week for the first time in two months as US President Donald Trump said he was weighing a “massive attack” on Iran, in the latest re-escalation of tensions across the Middle East. West Texas Intermediate crude futures rose to USD 92 a barrel.
The collapse of the ceasefire between Washington and Tehran has again largely shut off the Strait of Hormuz, ending a short-lived surge in shipments through the waterway, which typically carries about a fifth of the world’s oil supplies. Meanwhile, attacks by Houthi militants in the Red Sea threaten to further hamper global supplies.
At the start of the war in late February, countries relied on strategic oil reserves to mitigate the worst impacts of an energy supply crunch. Those stockpiles are now largely depleted, stripping the market of its key shock-absorbing cushion. “It’s worse than last time,” says Andy Harbourne, senior oil market analyst at Wood Mackenzie. “You need the de-escalation right now, and you need Trump not to get the big stick out this weekend, after the markets close.”
Energy Stockpiles Run Thin
The International Energy Agency agreed in March to make a record 400 million barrels of oil from strategic stockpiles available after a surge in global crude prices sparked by the Iran war. This week, the agency said that around 290 million barrels have already been released. Meanwhile, the United States’ Strategic Petroleum Reserve fell to around 310 million barrels last week (its lowest level since 1983) as the government continues a 172-million-barrel emergency release program.
“This brings us into a more dangerous phase versus March,” says Christopher Haines, global head of oil at Energy Aspects. “We have drawn down 300 mb [million barrels] of crude oil stock since March, including 170 mb of SPR [Strategic Petroleum Reserve], so global stock levels are far more constrained.”
Naveen Das, senior crude oil analyst at Kpler, says the market’s primary inventory buffer has been spent. Global crude floating storage has drawn down by 55% over the last ten weeks, plummeting to just 80.7 Mbbls (thousand barrels of oil) as of July 12 from 177.5 Mbbls in early May, according to the trade data intelligence firm. That is putting upward pressure on prices, with Brent crude oil prices having surged 40% since the start of July. Analysts now predict those prices could continue to climb.
“Assuming flows do not resume, it would put global oil and product markets back in a precarious situation, as inventories were already low after being drawn heavily in the previous months,” says Allen Good, director of equity research at Morningstar. “Eventually those stop gaps will run out, and we will need to see higher prices to reduce demand.”
Oil Could Rise Above USD 120 a Barrel
Goldman Sachs has warned that Brent crude oil prices could rally above USD 120 in the fourth quarter if disruptions persist. Its base case remains for prices to hover around USD 80 in the final three months of this year, should Middle East tensions again de-escalate. Meanwhile, it sees WTI averaging around USD 76 in the fourth quarter.
Still, the bank says prices could remain at current levels through much of July and August, as Middle East production wanes, summer travel boosts energy demand, and countries seek to replenish inventories. That would revive inflation fears, after modest data prints had encouraged policymakers to stand pat at recent meetings. As of Friday, traders are now pricing in a 30% chance of an interest rate increase at next week’s US Federal Reserve meeting, according to the CME FedWatch tool.
“If there’s no de-escalation, if the conflict continues, if the Strait remains effectively closed, how does the world reach a balance in this new equilibrium? And the answer is very high prices, because you need to destroy demand,” says Alan Gelder, senior vice president of refining, chemicals, and oil markets at Wood Mackenzie. “That just drives the global economy off a cliff. So we go into this energy-induced global recession.”
