Declining Oil Prices, Depleting Global Reserves: Strait of Hormuz Recovery Not Immediate

As oil benchmarks plummet with Brent falling below $80 per barrel, an increasing number of analysts are warning that even if the Strait of Hormuz reopens, oil production in the region won't recover immediately, and global oil reserves are depleting at an alarming rate.

Approaching Oil Supply Shortfall

Back in May, Jeff Currie from Carlyle Group warned that by July, some regions worldwide would face what he termed "minimum operating levels" of crude oil supply due to depleted reserves to avoid shortages amid the Hormuz crisis.

Analysts at Energy Aspects also noted in early June that even if a peace agreement is signed, it would take time for tanker traffic to return to pre-war levels. Meanwhile, the world is drawing from its oil reserves.

With increasing reports of a potential US-Iran deal in recent days, warnings against expecting an immediate return to production and oil exports from the Persian Gulf have also grown.

"While the conflict may have ended and oil flows through the Strait of Hormuz may gradually return to normal, the damage caused cannot be reversed overnight," said Priyanka Sachdeva, analyst at Phillip Nova, this week, as quoted by Bloomberg.

"This includes not only any physical damage to oil infrastructure but also the economic pressure that oil-importing economies have endured for many months with high energy costs."

Challenges from Insurance and Shipping

The publication gathered reactions from multiple energy analysts, and none of them endorsed the assumption that once a US-Iran agreement is signed—which remains far from certain—oil flows through Hormuz would miraculously recover.

An analyst at Vortexa also raised an important point about insurance. "If the US-Iran deal materializes and insurance companies are willing to insure vessels, laden tanker traffic will increase, followed by restarting crude oil production and then restarting refineries," said Xavier Tang, senior market analyst at Vortexa.

Global Oil Reserves at Alarming Levels

In the meantime, oil industry operators have also stepped up warnings about global oil reserve levels.

"In the coming weeks, we're likely to see these pressures impact the physical market more directly, and there's more upward price pressure than I would expect as we move into June and certainly into July," said Mike Wirth, CEO of Chevron, in early June.

"We're approaching unprecedented inventory levels," Neil Chapman, senior vice president of Exxon, also warned about low inventory levels at that time. "I mean literally, literally low. You could argue whether it's two weeks or three weeks. Once you get to that point, you're going to see prices spike."

US Oil Inventory Data

US crude oil inventories have been continuously declining, with the latest weekly report from the American Petroleum Institute (API) showing total inventories have decreased by 52 million barrels over the past nine weeks.

According to a recent Wall Street Journal report, inventories at Cushing have also decreased significantly, to around 21 million barrels, with the report noting that "At around 20 million barrels, tank farm operators start encountering significant complexities."

Issues with Strategic Reserves

These complexities first emerged with the strategic petroleum reserve system when the Biden administration released about 180 million barrels in 2022 to control oil prices after Western nations sanctioned Russia for invading Ukraine.

The problems stem from the need to maintain a certain level of oil in storage facilities for them to operate normally. The US isn't the only country using reserves to meet demand, which means the need to replenish those reserves is overwhelming a market that hasn't yet returned to normal operations and still has relatively strong demand.

Cautious Stance of Stakeholders

Beyond oil traders, no one seems enthusiastic about reopening the Strait of Hormuz. Insurance companies, as the Vortexa analyst mentioned, are naturally cautious, waiting to see what happens on Friday and beyond before returning to normal operations.

Shipping companies are also not eager to begin voyages. "We don't see any major shipowners changing their stance at this point. They are waiting for the situation," Anoop Singh, head of global shipping research at Oil Brokerage Ltd., told Bloomberg.

"Currently, no one has a clear understanding of the terms and text of this agreement," Anoop Singh said.

The Dual Reality of the Oil Market

It seems the oil market is once again in a dual reality. One side of that reality is the futures market, dominated by media reports driving optimism about ending hostilities in the Persian Gulf and normalizing energy trade, overlooking many challenges on the path to normalization.

The other side is the physical market, which has seen actual oil prices rise much higher than futures benchmarks, and has experienced significant inventory depletion that oil-importing countries would be eager to replenish as soon as possible—just in case.

By Irina Slav for Oilprice.com