Stress levels rising

It’s been just over 11 weeks since the Strait of Hormuz closed, and the global oil market has been holding up reasonably well. But JPMorgan analysts warn that this relative stability could soon be coming to an end.

In a recent note, analysts described the “illusion of plenty,” or the belief that the world’s stored oil surplus will continue to cushion the blow from the Middle East for the foreseeable future. They estimate there were 8.4 billion barrels of oil inventory stored around the world at the beginning of the year, which sounds like a lot—but the truth is, only about 10% is accessible to shore up the market during an emergency. 

The rest is tied up in various ways, including pipeline fill (pipelines have to be full in order to function, but this oil isn’t in storage), and tank bottoms (the residual sludge that accrues at the bottom of storage tanks, making them appear fuller than they are). There’s also a good chunk (about 4 billion barrels) tucked away in strategic reserves, but governments won’t touch those until the most dire circumstances dictate it.

Dire circumstances dead ahead

On paper, global oil inventories can act as a shock absorber for the disruption caused by the Strait’s closure. In practice, that safety net isn’t nearly as strong as it looks—and it’s quickly fraying.

Some economists estimate that inventories have been about 35% depleted as of late April, and unless something changes, JPMorgan says the global oil market will reach “operational stress” in early June. That’s when the oil industry starts to dip into the last of its reserves, spurring on serious price volatility.

What’s worse, unless the Strait of Hormuz is opened soon, the oil industry will fall below the “operation floor level” by September, or the minimum level of oil needed to keep things running. That’s when things get very bad: Pipelines lose pressure, refineries shutter, fuel rationing begins, and the entire system falls apart.

After that, we’re pretty sure Mad Max begins to look less like sci-fi and more like prophecy.

Watch the calendar

The good news: JPMorgan says the Strait of Hormuz will reopen by September. The bad news: It won’t be because of a peace deal or political pressure, but because it has to. That or the entire oil industry begins to implode.

And just because the Strait reopens doesn’t mean the problems are over. The analysts expect the new floor for crude prices to be about $80 per barrel, far above where it was before the war with Iran began. Then again, that’s still better than fighting wasteland raiders for a gallon of gas.—MR