Oil-Market Uncertainty Ahead as U.S. Inventory Hits 22-Year Low

Oil market experts have disagreements about what comes next if the Strait of Hormuz shutdown continues on, but inventories are falling, and some of the best-resourced and best-connected players in the market are beginning to voice concern - or at least a well-informed sense of uncertainty.

The U.S. Energy Information Administration reported Wednesday that total domestic oil inventories have fallen to the lowest level in 22 years, 433 million barrels, and (as of last week) are dropping by about 2.3 million barrels per day. These exceptional American inventory draws have helped underpin a high rate of export shipments, keeping global energy prices lower and helping maintain market stability. "We're just kind of pulling that out of our inventory, and we're shipping it overseas," Energy Intelligence's research director, Abhi Rajendran, told Marketplace.

If the Hormuz crisis continues and Mideast oil stays bottled up in the Gulf, there will be limits to what this reserve-status oil can do for the economy, warned Australian investment bank Macquarie in a research note. "If the strait remains closed, at some point prices will need to move much higher. The clock is ticking," Macquarie's analysts said.

The Trump administration has received the same message from top oil industry executives in private communications, according to Politico. "We have shared those concerns at the highest levels of government about what’s coming in mid-to-late June," one executive told the outlet. "I hope they are paying attention to inventories right now. You’re hitting tank bottom."

The White House denies that any such concerns have been received through private channels, but they have been conveyed in public. ExxonMobil SVP Neil Chapman warned last month that the industry is getting down to "unheard-of inventory levels."

"You can debate whether that’s going to hit, those really low levels, in two weeks or three weeks. Once you get to that point, then you’ll see price shoot up," he told a conference in New York, predicting physical Brent cargo prices of up to $160 per barrel.

Some prefer to acknowledge the uncertainty of the moment, without attempting to forecast the outcome. "When you panic, you actually lose the narrative," said Saudi energy minister Abdulaziz bin Salman Al Saud, speaking at a conference in St. Petersburg on Thursday. "For me to be silent is an admission - a humble admission - of the fact that I do not know what will happen, not tomorrow, but even in half an hour's time."

An uncertain ceasefire

The tenuous hold of the temporary ceasefire agreement between the Trump administration and Tehran is one of the key elements of that uncertainty, and it is tested on a daily basis.

In the latest example, an explosion occurred near Oman's Mina al Fahal oil terminal on Friday, and the facility was reportedly taken offline briefly for safety reasons. The blast occurred next to the SBM 1 and 2 single buoy mooring sites, two sources told Reuters. It is believed to have been caused by a drone attack.

The terminal is now operating normally, Petroleum Development Oman (PDO) said in a follow-up.

Oil prices edged slightly upward at the news of the strike before retreating once more. Brent crude futures traded at about $94 per barrel on Friday morning, about 15 percent below last month's peak.