The global oil market is teetering on the edge of a precipice, with the ongoing crisis in the Middle East sending shockwaves through the industry. As the war persists, the supply situation is deteriorating at an alarming rate, leaving analysts and executives concerned about the long-term implications. The situation is particularly dire as it coincides with a time when refiners typically build up inventories ahead of peak demand season in the northern hemisphere. Summer is peak driving season, and with air travel and farming activities also at their highest, the demand for oil is usually at its peak. However, this summer is set to be different, as the price spike resulting from the Middle East crisis will undoubtedly hurt demand, not just in Asia where shortages are already being felt, but across the globe.
One of the key issues is that the crisis has hit at a time when global oil inventories are already significantly lower than they were five years ago. In 2021, the world had over 90 days' worth of demand in inventories, but since then, this has dropped to below 80 days' worth, and the trend is continuing. This is potentially problematic because the drawdown comes from inventories that were already significantly lower than five years ago. As TotalEnergies' chief executive Patrick Pouyanne noted, the world has been drawing oil from stockpiles at a rate of between 10 and 13 million barrels daily, which amounts to a total of 500 million barrels already drawn from global inventories since the start of the war. Some are even more pessimistic, with Rystad Energy estimating a total supply loss of some 600 million barrels since the start of March.
The implications of this are far-reaching. If tanker traffic in the Persian Gulf returns to normal at the end of the current month, the global oil supply loss would still range between 1.2 billion and 2 billion barrels, which is equal to between 16% and 27% of pre-war supply, according to Rystad's chief economist Claudio Galimberti. This is a significant amount, and it raises a deeper question: what does this mean for the future of the oil market? The answer is complex, but one thing is clear: the longer the crisis extends, the more palpable the effect of scarcity on prices and, consequently, demand will become.
Europe is already facing a shortage of jet fuel, with airlines canceling future flights, and Asia is struggling with a shortage of naphtha, an essential feedstock for plastics production. Even the United States is experiencing a strong crude oil inventory drawdown that is depleting its own supply shock cushion. As of May 1, U.S. gasoline stocks were at 219.8 million barrels, which is 4% below the five-year average and the lowest since 2014 for this time of year. The longer the crisis extends, the more palpable the effect of scarcity on prices and, consequently, demand is going to become.
The situation is further complicated by the fact that the prospect of a swift end to the hostilities remains distant. The U.S. and Iran are continuing to trade peace proposals back and forth, but nothing productive has yet come out of this. This raises a deeper question: what does this mean for the future of the oil market? The answer is complex, but one thing is clear: the longer the crisis extends, the more palpable the effect of scarcity on prices and, consequently, demand will become. The world's oil supply is going to melt further, and the implications of this are far-reaching. It is a situation that demands urgent attention and action from the industry and policymakers alike.
