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

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

World has used temporary buffers to absorb the shock of the Middle East war. These include commercial stocks, oil in transit or stored at sea, and emergency reserves. Executives from major energy companies and investment banks, as well as market analysts, have said that the full impact of the disruption in oil supplies is yet to be felt by the markets and global economy. It will take many months for Middle East exports and production to return to their pre-war level.

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 will exit the conflict with very low inventories," TotalEnergies' CEO Patrick Pouyanne stated 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 oil inventories 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 is over. 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 fall rapidly in the event that 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 disruption in history. 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 this year. This is up from $62 in January.

As countries and companies around the world?look to rebuild their stockpiles, and restart closed-down production facilities, demand is expected to increase once the conflict ends. Some countries who have experienced shortages will start building up new stockpiles. 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, the world will have lost between 1.2 billion and 2.0 billion barrels. This is equivalent to 16-27% pre-war inventories.

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

Exxon Mobil CEO Darren Woods said in an analyst conference call last week that the market had not yet seen the full effect of the disruption of the global supply of oil.

Morgan Stanley forecast that U.S. gasoline inventories would fall to around 198 millions barrels by the end of summer, the lowest level ever for this time period in history. 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 face jet fuel shortages by June if Middle East supply disruptions are not fully rectified.

According to a Goldman Sachs note published last week, Ireland only had 10 days' worth of jet fuel in stock. According to Kpler's data, in Asia, crude oil imports dropped 30% from a previous year in April, 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.

Slow Recovery

Executives and analysts have said that even if the supply routes reopen, it will take a long 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.

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)