Oil Producers Warn of Declining Reserves as Hormuz Shutdown Continues
As U.S. and Iranian forces continue to exchange limited fire in and around the Strait of Hormuz, multiple oil producers are warning that physical supplies may begin to show signs of strain by the end of summer, even if today's market price signals are stable.
"I think the way we see things today, it’s difficult to predict a very bright, you know, outcome," ADNOC CEO Sultan al-Jaber told Al Arabiya. According to al-Jaber, if global demand creeps back up and the Hormuz crisis continues, global oil prices could resume their upward march as early as August - with Chinese demand a key determinant. China has been leaning on refinery run cuts, product shifts and existing stocks in order to keep import buying low, and the timing and volume of its return to the global oil market will play a major role in price dynamics.
In all predicted scenarios, full oil flows through the Strait of Hormuz would only return in early 2027, al-Jaber said - effectively locking in elevated pricing for the rest of the year.
For its part, ADNOC has been one of the most active players in moving seaborne oil cargoes past the Iranian blockade in the Strait of Hormuz, and it is halfway done with construction of a second crude oil pipeline to bypass the waterway by transferring oil overland to the port of Fujairah. Together, those pipelines will have enough capacity to move the UAE's entire prewar production volume. In addition, according to the FT, the UAE is planning to build a parallel pipeline system to move refined petroleum products on the same route; this will be a relief to European customers who buy distillates in the Mideast.
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Energy consumers around the world have been kept afloat by massive draws on reserves, notably in the U.S., which has been drawing down its Strategic Petroleum Reserve (SPR) at a record pace. Crude exports from the U.S. to foreign refiners hit 5.4 million barrels a day last week, up from 4 million barrels per day just before the war. The combined commercial crude storage and SPR drawdown came in at 2.3 million barrels per day, about half of it from the strategic reserve.
That may not last forever. The latest data from the Energy Information Administration (EIA) shows that the SPR has dropped by 50 million barrels since the start of the conflict in February, and is on track to fall below the Biden-era low of 350 million barrels within weeks. At its record high in 2010-16, the SPR averaged twice that amount, about 700 million barrels. It last reached these levels in 1983, during the initial fill-up period when the system was created. The minimum operating level is believed to be in the range of 240 million barrels, below which point the system may risk technical difficulties, including problems maintaining adequate pressure and structural integrity in underground salt cavern storage reservoirs.