Global oil reserves plunged at a record rate in April, as the ongoing Iran war and ensuing closure of the Strait of Hormuz strained supplies, according to estimates by S&P Global Energy reported on May 6.
Stockpiles of crude fell by nearly 200 million barrels, or 6.6 million barrels per day, even as higher prices triggered a collapse in demand of about 5 million barrels per day, marking the sharpest ever fall outside of the COVID-19 pandemic, according to estimates by the commodities giant that were published by Hellenic Shipping News.
Jim Burkhard, vice president and global head of crude oil research at S&P Global Energy, said that while there have been significant impacts to date, “the oil market has remained somewhat cushioned from the full impact of the loss of 15 million barrels per day in supply.”
“That the cumulative supply loss is now approaching 1 billion barrels a day is a staggering figure that inventories cannot cover indefinitely,” he added, saying that an “inevitable market reckoning is coming.”
According to S&P Global Energy, as reported by Hellenic, the immediate reopening of the Strait of Hormuz would not be a quick fix at this stage, with the commodities giant saying that if the waterway were to reopen, it would take an additional seven months at minimum to fully restore upstream production, assuming no permanent damage and supply chains operate smoothly.
“Before the war, any market veteran would not have been surprised if crude oil prices soared far higher than they have based on a two-month loss of 15 million barrels a day,” Burkhard said. “What is a tremendous curtailment of demand is still being outstripped by the loss of supply. That means that higher crude oil and refined product prices are still to come.”
Oil prices dropped to two-week lows on May 6 after President Donald Trump’s remarks on ongoing U.S.–Iran negotiations sparked speculation that the United States and Iran were nearing an initial peace deal.
The drop in the price comes after it hit a four-year high of more than $126 a barrel on April 30.
S&P Global Energy’s warnings follow Chevron CEO Michael Wirth’s comments on May 4 that physical shortages in oil supply would begin appearing around the world because of the closure of the Strait of Hormuz.
“We will start to see physical shortages,” Wirth said during a discussion sponsored by the Milken Institute.
“Demand needs to move to meet supply. Economies are going to have to slow.”
Asia is most heavily dependent on the Gulf’s oil production and refineries, with Europe likely to be affected next, Wirth said.
The overall effect of the Hormuz closure is “potentially as big as in the 1970s,” Wirth said.
During a May 4 interview with Bloomberg, Wirth said he advised the Trump administration that the supply situation is tightening.
He said that he had told people in the administration that the “buffers in the system that help ensure supplies are available to markets are being drawn down.”
“And what that does is it creates more upside price pressure, potentially more volatility, and more risk,” he said.
He added that the United States cannot offset the Hormuz supply shock.
“The U.S. is the largest producer in the world, and we’ve been exporting products, crude oil, gas, in growing quantities in recent years. And so it’s a good thing for the world that the U.S. is able to help meet the need,” he said.
“That said, 20 percent of the world’s energy supply flows through the Strait of Hormuz. That’s oil, that’s liquefied natural gas, it’s refined products,” he said, adding that this goes to Europe and Asia primarily, and both of those regions “are seeing the impact of having that much cut off.”
“The U.S. can’t make up all of that supply. Inventories in the system are being drawn down and the supply situation is tightening, and that’s a concern.”