Global oil and product inventories have been heading lower since the US/Israel war with Iran began.
Western countries initially agreed an emergency 400mb release of reserves, to keep markets supplied:
- But now, oil inventories are reaching ‘tank bottoms’ as the Dow Chemical chart shows
- And they cannot start to be refilled until the Strait of Hormuz reopens
Shipping analysts Lloyds List Intelligence say the critical Middle East port of Fujairah has now hit ‘tank bottoms’:
“Availability has become virtually absent with traders observing no bunkering activity this week for VLSFO bunkers.”
SHORTAGES ARE STARTING TO APPEAR IN CRITICAL AREAS
Increased US supplies have been key to replacing lost Arabian Gulf output as the US EIA reports:
- Net exports of US oil and products have been at record levels of ~5.8mbd since April
- But Middle Eastern oil producers have cut output by over 11 mbd since Hormuz was shut
- Global inventory has been reduced by 6.3 mbd in Q2 with Q3 expected to see a 7.6 mbd draw
- As a result, oil inventories in OECD countries are the lowest since 2023 as the chart shows
Today’s higher prices have already led to demand destruction, particularly in Asia. Poorer countries simply cannot afford to pay.
Global demand is therefore already down by 1mbd versus last year. And it will likely go lower, as we move into the winter. As MorningStar report, “Global supplies of fertilizer are particularly vulnerable“.
“The second order effects are everywhere: Diesel shortages, mining operations, shipping rerouted from Asia is doubling transit times, jet fuel scares, construction costs climbing on fuel surcharges.”
INFLATION IS TAKING OFF AROUND THE WORLD
The higher prices meant US inflation saw another increase last week to 4.2%, as the chart shows. It was just 2.4% in February, before the war began.
And financial markets are already beginning to raise interest rates:
- The European Central Bank raised its rate by 0.25% to 2.25% last week
- Other central banks will no doubt need to take similar action
- Their problem is that higher energy prices quickly impact food and transport
China is also beginning to export inflation, as the chart shows.
Its emergence as the ‘manufacturing capital of the world’ was key to reducing Western inflation:
- But its Producer Price Inflation jumped to 3.9% in May
- It had been a negative -0.9% in February before the war began
THE SUPPLY CHAIN WILL TAKE MONTHS TO RECOVER
The I.C.I.S. map highlights the key oil refineries affected. The scale of the damage to oil and product supplies is huge as a new World Bank report warns:
“This is the biggest supply shock in more than 50 years. If the conflict persists, the next thing that will be affected is food prices.
“Global growth could fall to 1.3% this year if energy supply disruptions prove more severe than assumed and are accompanied by substantial financial stress.”
Senior oil executives have also warned the White House that the oil reserves are running “dangerously low“:
“The Strategic Petroleum Reserve is going to be precariously low. What comes next is higher prices. We are getting closer to the bottom.
“July is likely the pain point when the market turns.”