Oil Prices Poised for Potential Surge Amid Prolonged Strait of Hormuz Closure

Global oil markets are facing mounting pressure as the prolonged closure of the Strait of Hormuz continues to disrupt supply chains. Analysts caution that if the strait remains closed and current inventory depletion rates persist, oil prices could escalate to $130-$140 per barrel by next month.

JPMorgan has indicated that commercial oil inventories in developed nations may reach operational stress levels by early June. Similarly, Saudi Aramco has highlighted the risk of global gasoline and jet fuel inventories dropping to critically low levels ahead of the summer season.

The International Energy Agency (IEA) reports that as of May 8, a record 164 million barrels have been released from government and industry reserves to mitigate the shortfall. The IEA warns that "rapidly shrinking buffers amid continued disruptions may herald future price spikes ahead."

The ongoing U.S. and Israeli military actions in the region have led to the effective closure of the Strait of Hormuz, a vital conduit for global oil shipments. Efforts to reopen the strait have been hampered by continued hostilities, including attacks on ships in the Persian Gulf and a U.S. blockade on Iranian oil.

Hamad Hussain, climate and commodities economist at Capital Economics, stated, "But if the Strait remains effectively closed and commercial oil inventories in the OECD continue to be run down at the same pace as they were in April, oil stocks could reach critically low levels by the end of June." He added that such a scenario "would be consistent with Brent crude prices reaching an all-time nominal peak, and could require more disorderly and economically damaging cuts to oil demand."

On Friday, Brent crude futures rose over 3%, closing at $109.26 per barrel, as China refrained from pressuring Iran to normalize tanker traffic. While oil futures have not yet reached extreme levels, this is attributed to initial ample supplies, record releases from strategic reserves, and a decrease in Chinese oil imports as the country utilizes its own stockpiles.

However, the sustainability of these measures is in question. Further releases from oil inventories are constrained by operational requirements, and the daily flow of releases is limited. Additionally, an estimated 1 billion barrels of oil have already been lost, surpassing the IEA's planned total release of 400 million barrels.

Some Asian countries have begun implementing rationing measures to curb demand. Hussain noted, "But given the extent of supply losses from the Middle East, the risk of a 'non-linear' adjustment in demand and prices will continue to grow for as long as the Strait of Hormuz remains effectively closed."

Analysts at UBS have also observed that oil inventories are nearing record lows, cautioning that "buffers have now largely been exhausted." They warn that as stockpiles diminish further, oil prices could become more volatile, with a heightened risk of panic buying if physical dislocation intensifies and the Strait of Hormuz remains closed.