Global oil inventories have fallen to an 11-year low, a situation worsened by the ongoing geopolitical conflict in the Middle East that has removed 14 million barrels per day of supply from the market.
"The fact that prices remain at relatively subdued levels, despite what is arguably the largest supply disruption in modern history, suggests that demand destruction is proving stronger and more widespread than expected," said Saxo Bank analyst Ole Hansen.
Global oil inventories fell by a record 246 million barrels in March and April combined to 7.952 billion barrels, the International Energy Agency said. Brent crude futures traded around $105.61 a barrel on Wednesday, down significantly from highs over $160 per barrel in March. The decline comes as Chinese refiners cut runs by nearly twenty percent and the U.S. increased exports to 13 million bpd in early May, according to the Energy Information Administration.
Analysts warn the relative price stability is fragile. Citi expects Brent to rise to $120 a barrel in the near term, while Wood Mackenzie forecasts prices could approach $200 if the Strait of Hormuz remains largely shut through year-end.
Market Balancing on a Knife's Edge
The fall in prices from their March highs has been driven by significant demand destruction, primarily from China. The country's refiners have slashed production by almost a fifth, bringing forward maintenance and reducing import volumes in favor of using stored crude. Across Asia, oil imports fell to a 10-year low in April as refiners opted to process cheaper stocks accumulated before the conflict.
To fill the supply gap, the United States has ramped up exports of both crude and refined products, which rose to 13 million bpd in the first two weeks of May. The U.S. government has also sold 133 million barrels from its Strategic Petroleum Reserve to cushion the blow.
Despite these measures, analysts believe the market is running on borrowed time. "No one wants to pay for the next expensive barrel. Everyone's waiting in hope, but at some point all these inventories are going to run out," said George Dix, an analyst at Energy Aspects. The firm's data shows OECD Asia and Oceania crude stocks fell twelve percent in May from pre-war levels. Once these inventories are depleted, refiners will be forced to re-enter the spot market, likely triggering another surge in prices.
This article is for informational purposes only and does not constitute investment advice.
