Even if the conflict ends, oil supply shock will worsen due to further decline in inventories

Even if U.S. and Iran reach a peaceful agreement to end their conflict, oil supplies will tighten in the coming weeks. It will take weeks for oil to be shipped from the Middle East Gulf to refiners around the world. Oil companies will therefore continue to deplete the storage tanks they have to meet the peak summer demand.

World has temporarily buffered the impact of the Middle East war by using?commercial stocks, oil in transit and stored at sea as well as emergency?reserves. Markets and global economies have yet to feel the full impact of the disruption to oil supplies. It will take many months for Middle East exports and production to return to pre-war level, according to executives from major energy firms, investment banks, and market analysts.

The rapid depletion in commercial stocks and emergency reserves occurred at a moment when refiners, retailers and others are preparing for the peak summer demand. Global energy systems will be unable to cope with the surge in demand from summer driving, agriculture, aviation and freight.

Executives and analysts say that this would put pressure on the global energy system, and it would also take longer for oil producers to alleviate supply shortages. Fuel prices would then be higher than they were before the war. Even if, as I hope, the conflict ends in May, we would exit the conflict with very low inventories, said TotalEnergies CEO Patrick Pouyanne last week. He estimated that global hydrocarbon stocks have been drawn down by 10 to 13 million barrels a day, which has resulted in 500 million barrels of stockpiles being consumed.

Comparatively, the U.S. crude stockpiles are around 460 million barrels. Equinor CEO Anders Opedal stated on Wednesday that the market would not return to normal for at least six more months, even if peace were to be achieved in the Middle East.

'UNPRECEDENTED DISRUPTION'

Donald Trump, the U.S. president, has stated that prices will drop rapidly once the conflict ends. The progress in talks between the U.S., Iran and a framework agreement led to a 7.8% drop on benchmark Brent crude to $101.27 per barrel on Wednesday. Oil futures will likely drop quickly if a deal is reached, but it may take some time for physical crude oil and gasoline to return to their pre-war prices as the supply recovers from the largest?supply disruptions ever experienced. Analysts have raised their predictions for this year. A poll conducted last week showed that they expect Brent futures prices to average $86.38 per barrel in this year. This is up from $62 per barrel back in January.

As countries and companies around the world rebuild their stockpiles and restart production facilities that were shut down, demand is expected to increase. Some countries who have experienced shortages will also start building up new stocks. Australia, which imports 80% of its fuel, and has been experiencing shortages ever since the beginning of the conflict, announced on Wednesday plans to spend $7.22 Billion to build up reserves. Last month, the European Commission announced that it would review EU requirements for countries to maintain at least 90-days of oil supplies. This requirement will include jet fuel. Stockpiles are down rapidly since the beginning of the war in late February. Goldman Sachs warned this week that global inventories will drop to 98 days' supply by the end May, down from 101 days now and 105 days in February.

Rystad Energy estimates that the world has lost 600 million barrels so far. Claudio Galimberti is the chief economist of Rystad Energy. He said that by the time the supply returns to normal at the end May, it will be lost between 1.2 and 2.0 billion barrels, which is equivalent to 16-27% pre-war inventories.

The global gas supply has also been severely affected by the shutdown of Qatar's LNG production and the damage caused during the war. Galimberti stated that the loss of LNG will be between 30 and 50 millions tonnes, which is equivalent to 7%-11% annual global supplies.

Exxon Mobil CEO Darren Woods stated in a recent analyst call that the market had not yet seen the full effect of the disruption of the global supply of natural gas and oil.

Morgan Stanley forecast that U.S. gas inventories would fall to around 198 million barrels in late summer, the lowest ever for this time of year. U.S. gasoline inventories were under 220,000,000 barrels at the beginning of May, according to government data. This was the lowest level for this time since 2014. The drawdown has been accelerated by increased exports in response to countries facing shortages.

The International Energy Agency warned that Europe could be facing a?jet fuel crisis as soon as June, if Middle East supply disruptions are not fully rectified.

According to a report published by Goldman Sachs last week, Ireland only had 10 days' worth of jet fuel in stock. According to Kpler's data, crude oil imports in Asia fell by 30% from a previous year to the lowest level since 2015. This highlights the severity of the supply disruptions in the largest oil-consuming area in the world. Singapore's bunker hub saw its onshore fuel oil inventory fall to a nearly one-year low during the week ending April 29. Both imports and exports were down, according to data released last week.

Slow Recovery

Analysts and executives said that even if the supply routes are reopened, it will take time for the global energy system to recover.

Woods stated that it will take between one and two months to restore oil flow after the Strait of Hormuz is reopened, once shipping backlogs are cleared. The average time for ships to travel from the Middle East into the European Union is 30 days, and the 40-day journey from there to the U.S. takes place in the following months.

Willie Walsh is the president of the International Air Transport Association. He said that the Middle East's refining capacity has been disrupted, and will hinder the recovery of supply. Nearly two million bpd are currently offline. Fuel from the Middle East plays a key role in meeting demand for Africa, Asia and Europe.

(source: Reuters)