Oil’s Battered Shock Absorbers Risk Price Spike as War Returns

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Or sign-in if you have an account.e5yuv}cm7jq847tgz5p7)j9c_media_dl_1.png US Department of Energy(Bloomberg) — Global oil markets have been spared an extreme squeeze during the first phase of the Iran war, but renewed fighting is bringing with it greater risk of a price spike in a world where supply buffers have been worn perilously thin. THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountWhen the Strait of Hormuz first closed in March, many expected that an energy crisis was at hand. But the release of emergency oil stockpiles, a stealthy flow of supplies from some Persian Gulf countries, and China’s surprising ability to suppress imports bought the world enough time to avoid the gloomiest scenarios.By the time the US and Iran signed their peace deal in June, the market looked better supplied than many people feared at the start of the war. The subsequent gush of Middle East exports even created a surplus in Asia, prompting some countries to make plans to replenish stocks as crude prices plunged.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againNow, traders are warning of a looming supply danger — especially for refined fuels.If escalating US and Iran hostilities were to essentially shut Hormuz once again — at the same time that Ukraine’s bombardment of refineries creates an unprecedented crisis that has slashed fuel exports from Russia — the world’s inventory shock absorber may be too depleted to keep prices in check.“If the current situation lasts longer, and the Strait of Hormuz is closed, then we may again have some difficulties,” Fatih Birol, executive director of the International Energy Agency, said in an interview with Bloomberg television. Warning signs are flashing across energy markets. Crude is back above $85 a barrel in London; American truckers and farmers are paying $5 a gallon for diesel; natural gas is still too expensive for Europe to properly refill its storage tanks before winter. These price trends could thwart US President Donald Trump’s promise to lower the cost of living, and push policymakers from the Federal Reserve to the Bank of England to hike interest rates to defend against further inflation. People at major trading houses, refiners and hedge funds in Europe and Asia pointed to a set of key vulnerabilities: shrinking oil inventories; severe tightness in the supply of fuels like gasoline and diesel; and doubts over whether consumer governments really can dip even deeper into their emergency reserves if needed.Between March and May, global observed oil inventories fell by 360 million barrels, or a rate of 3.9 million barrels a day, according to the Paris-based IEA. They rebounded by 21 million barrels in June.The US — which played a key role in offsetting the loss of Persian Gulf supplies by ramping up production and exports — has seen its nationwide crude inventories tumble to the lowest since 1984. Supplies at the country’s commercial storage hub in Cushing, Oklahoma, are just above what’s considered to be “tank bottoms,” the minimum level required for normal operations.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.The picture is less clear in the other big part of the oil equation — China.Beijing has weathered the crisis with greater ease, reducing processing rates at refineries and tapping commercial inventories in order to dramatically curb imports. But there’s no transparency on whether or not the country has tapped its own mammoth strategic reserves.If China is excluded, global stockpiles are at a record low, according to JPMorgan Chase & Co., leaving the world with “little room for error.” The situation for fuels is even more precarious. That’s because refineries in the Middle East and Asia reduced operating rates to adjust to the disruption of crude flows through Hormuz, traders say. America’s gasoline stocks are at the lowest for the time of year since 2012, while stores of middle distillate fuels such as diesel — used mainly by haulage and agricultural vehicles — are considerably below their five-year average, according to the Energy Information Administration. Tightness in diesel markets is being exacerbated by the ban on overseas shipments from Russia, the world’s second-largest exporter of the fuel after the US, due a wave of Ukrainian attacks on its refineries that have caused domestic shortages. Europe has been spared the nightmare scenario of mass flight cancellations, and jet fuel inventories in independent storage at the Amsterdam-Rotterdam-Antwerp shipping hub have steadied after plunging 40% since the start of the war, according to Insights Global, which gets data from terminal operators. Still, they remain near the six-year low reached last month.“Refined product markets are even tighter than crude,” said Christopher Haines, global crude analyst at consultant Energy Aspects Ltd. If the conflict between the US and Iran chokes off Hormuz shipping once again, consumer nations will further erode their fuel stockpiles. The IEA, which coordinates developed economies’ emergency oil releases, says right now there’s still a safety buffer.Members of the organization led by the US, Japan and Germany pledged to tap 400 million barrels of oil reserves soon after the start of the conflict. A quarter of that oil currently has no fixed release date, according to the agency.Germany says it still has millions of unsold barrels from the first stockpile tranche, and has laid out plans to refill reserves of diesel. Japan has been restocking its commercial petroleum reserves, according to data from the Ministry of Economy, Trade and Industry.Perhaps the most critical point is the US, where the Strategic Petroleum Reserve — a series of massive underground caverns along the Gulf of Mexico — has fallen to the lowest since 1983. Officials have said there are no plans to release more, while Energy Secretary Chris Wright has proposed using “creative ideas” for refilling the deposit. Overall, there’s a 200 million-barrel chunk of emergency stockpiles that has yet to be released, according to Alex Kavouris, head of regional analysis at FGE NexantECA, a consultant. The market can cope, provided the latest Hormuz disruption isn’t too protracted and deep, he said. The world still has tools that can be deployed to fill the supply gap, said the IEA’s Birol, “but none of them are endless.”—With assistance from David Gura, Joe Carroll, Alex Longley, Petra Sorge and Jack Farchy.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.