Global oil stockpiles are approaching critically low levels after more than 15 weeks of reduced supply from the Strait of Hormuz, and energy executives at Chevron, Exxon Mobil, and Quantum Capital Group say that without a rapid influx of crude, prices could surge to $150 a barrel or higher.
The warning comes as the U.S. and Iran have agreed to a deal, expected to be signed Friday in Switzerland, to reopen the strait through which 20% of the world’s petroleum typically flows. MSI previously reported on the precarious state of the oil market as prices rose on renewed U.S. strikes near the waterway earlier this month. Even if the diplomatic accord holds and the waterway is quickly reopened, analysts say it could take months for the oil market to return to normal and for depleted inventories to be replenished.
Since late March, the U.S. has drawn about 66 million barrels of crude oil from its Strategic Petroleum Reserve, a system of salt caverns on the Gulf Coast created in 1975 after the Arab oil embargo. The Trump administration authorized the release of 172 million barrels, and if drawdowns continue at their current rate of roughly 7.9 million barrels per week, that allotment could be exhausted by early September.
If fully exhausted, the release would bring inventories to 243 million barrels, a historically low level. The SPR peaked at more than 700 million barrels in 2009. Drawing further from the stocks would limit the U.S.’s ability to respond to future disruptions, including natural disasters such as hurricanes that can damage fuel supply chains.
Commercial stockpiles are also under strain. At the key storage hub in Cushing, Oklahoma, inventories have dropped to 21 million barrels, down roughly 1 million barrels in the latest week. At around 20 million barrels, tank operators begin facing complications because tanks typically need 10% to 15% of their capacity in storage to guarantee smooth operations, said John Auers, managing director of refined fuel analytics at RBN Energy, part of analytics firm Novi Labs.
“Whenever you get to tank bottoms, the whole operation gets bogged down,” Auers said. He cautioned that the 20-million-barrel limit is not hard and fast, and operators would likely try to keep pumping crude out at a slower rate.
Mike Wirth, chief executive of Chevron, has repeatedly warned on television that the supply crunch would soon manifest itself around the world. Neil Chapman, a senior vice president at Exxon Mobil, has said the U.S. is approaching “unheard-of inventory levels.” Wil VanLoh of Quantum Capital Group said “it’s going to get ugly.” VanLoh added, “The world has never had to destroy 10 million barrels a day of oil demand,” referring to the crude production not reaching global markets.
Chapman said at a conference in New York that physical oil prices could rise as high as $150 or $160 a barrel once the limits at global hubs are hit. “You can debate whether that’s going to hit those really low levels in two weeks or three weeks. But once you get to that point, then you’ll see prices shoot up,” he said.
U.S. oil prices fell 4.1% to $81.42 a barrel on Sunday evening shortly after trading opened. They have fallen more than 25% from early April, when they approached $113. Gasoline prices at the pump have also declined in recent weeks.
Energy Secretary Chris Wright told the Wall Street Journal last week that Trump has been briefed on the inventory situation and the administration does not foresee a jump in energy prices. “I don’t think so…we got a challenge, but I think we’re solving the challenge,” he said.
At a Bloomberg event on Friday, Wright said 7 million barrels a day of oil and refined products were making it out of the strait with the help of the U.S. military. Wirth, speaking at the same event, expressed skepticism. “Our view would be it’s probably not quite that much,” he said.
The White House expressed confidence in the diplomatic track. “When the president forces this conflict to a successful end, gas prices will drop back to multiyear lows and global energy markets will be much more stable long term,” White House spokeswoman Taylor Rogers said.
The deal to reopen the strait and end the American blockade of Iran sets the stage for more difficult nuclear negotiations to come, U.S. officials said. The two sides have had major differences over the U.S. demand that Iran hand over or dilute its supply of highly enriched uranium so it cannot be used to make a nuclear weapon. Without a definitive resolution of the nuclear questions in the coming talks, the longer-term security of the strait would remain uncertain.