Business
Are global oil stocks big enough to weather another six months of US-Iran war?
As the US-Iran war drags on with no end in sight, oil traders and policymakers are grappling with a critical question: are global oil stocks enough to offset what could become the biggest supply disruption on record?
The answer is far from clear, depending not only on how much oil remains in storage, but also on how much of it can actually be released.
DISRUPTION DOESN'T GET ANY EASIER
How long reserves would last can only be ascertained by figuring out the size of the current disruption. The head of Saudi Aramco believes the world has lost 2.6bn barrels of oil since the start of the war, making it the largest supply disruption ever in cumulative terms apart from the 1979 Iranian revolution, according to Reuters calculations.
That amounts to a massive 25 days of global consumption based on pre-war global oil demand of 103mn barrels per day. However, China cut demand in recent months and that means the world is consuming less oil.
Most analysts believe the daily supply gap to cover demand amounts to 5mn bpd even though Aramco says the world is losing 11mn barrels of supply from the Gulf daily. The gap might have widened in July after Ukrainian drones shut the Kazakh CPC pipeline, pumping 1.8mn bpd.
EMPTY AFTER 180 DAYS
The West's energy watchdog, the International Energy Agency, in March announced a release of 400mn barrels from emergency reserves and says the global economy still has substantial stocks.
IEA stocks consist of government-held stocks and commercial stocks — together standing at 1.5bn barrels and enough to cover the current estimated supply gap of 5mn bpd for 300 days.
However, the IEA cannot order the release of commercial stocks, such as those held by refiners for operational reasons.
That leaves only 0.9bn in government-held stocks — enough to cover the supply gap for 180 days. The IEA said it is ready to release more if the crisis worsens.
AS EMPTY AS DURING REAGAN'S PRESIDENCY
The IEA does not disclose the precise make-up of stocks.
Of its remaining government-held stocks, one-third is held in the US. Crude oil stocks in the US Strategic Petroleum Reserve fell to the lowest levels since January 1983, when Ronald Reagan was president.
The US Government Accountability Office warned in May that SPR's infrastructure was deteriorating fast and that a quarter of reserves is no longer available.
This implies that over 100mn barrels have become impossible to release, according to analysts from Rapidan Energy.
If the US has only 200mn barrels of accessible SPR stocks left, they can cover just 40 days of the current supply gap.
DIESEL SHORTAGE
A new IEA release is unlikely as many countries have limited stocks left, said Christian Egeland from Energy Aspects.
The depletion of inventories has reduced the buffer against supply shocks, leaving the oil market vulnerable to sharp price rises, said Hamad Hussain from Capital Economics. Global stocks of diesel and jet fuel are currently at the bottom of their five-year range, according to Morgan Stanley. The wars damaged Middle Eastern and Russian refineries and have hit diesel and jet fuel particularly hard, said Survo Sarkar of DBS Bank.
CHINA COULD WITHSTAND THE CRISIS FOR MUCH LONGER
Total global oil stocks, including all types such as commercial stocks, the US SPR, Chinese stocks and stocks on water, look fairly comfortable, according to the IEA.
But a big chunk of those are not real supply buffers as stocks on water, for example, often represent oil and fuel already sold and in transit.China doesn't disclose its reserves.
Energy Aspects estimates China held nearly 1.7bn barrels of crude in July. However, estimates between consultancies vary at 1.0bn to 1.7bn. In addition, there are unknown quantities of fuel and petrochemicals held in inventories.
With a reserve of 1.7bn, China could cover its pre-war imports through the Strait of Hormuz, about 5.5mn barrels per day, for almost a year, one of the most comfortable levels in major economies alongside Japan.