Oil Narrative

Market Overview

Market still not pricing in supply shock hit

Oil Narrative

Market has been remarkably calm even as warning bells on the supply shock we are seeing due to the Iran war surpasses the scale of past events.

Even if the Strait of Hormuz is reopened quickly, the crude supply loss of 10-11 mbd due to production shut-ins will take at least 3 months to recover.

Flow normalisation is expected to take 3-6 months as we need vessels to return to offtake the high inventories in both crude and products in the Middle East, and vessels to reposition back to the region.

Observable OECD stocks are drawing down fast

Oil Narrative

Total US crude and product stocks are already at the bottom of the 5-year range.

IEA 400 mb SPR release is mid way through, with US SPR plan of 172 mb in full swing.

The lowest inventory levels that have not been seen before in the past 10 years would highly concerning based on expected drawdown trends, particularly as we head into peak summer demand.

Reinventorising will be a key theme

Oil Narrative

After SPR and commercial stocks are drained, there will be a need to reinventorise the lost volume. 1 billion barrels of inventory loss has been the headline number so far.

Additionally, countries that have been hard hit by the lack of fuel reserves have now come out to say they will review the need for additional reserves (Australia, New Zealand). The alternative to build new refineries will take too long, so increasing fuel reserves is more likely the first outcome post-crisis.

ASEAN leaders are also pursuing a regional fuel stockpile but currently hindered by the mechanics of how this can be implemented.

The backwardated structure will make it hard for industry players to contribute to this stockbuilding initiative.