The International Monetary Fund says oil markets have used up the three shock absorbers that kept crude prices from setting records during the U.S.-Iran war. Brent crude topped $100 per barrel in mid-July, and U.S. strategic reserves have fallen to their lowest level since 1983. With the ceasefire collapsing, the fund warns the next supply shock would land on a weaker market.
Oil markets won't be able to absorb another blow to supplies if conflict with Iran resumes in the near future, according to the International Monetary Fund. Markets have depleted a trio of shock absorbers that kept crude prices from skyrocketing to record-setting levels, the fund said in a recent blog post.
The room left to absorb a shock is now smaller and shrinking further as spare capacity has been deployed, demand has compressed and inventories have been drawn down, the IMF said. The fund warns that inventories must be replenished: "the world will start from a weaker position when the next shock comes".
Cracks are already showing. Brent crude topped $100 per barrel in mid-July, then prices stabilized at the end of the month after the U.S. announced a pause in hostilities.
Inventories, extra output and China's buying pause
Inventories were one of the absorbers the IMF identified. From March through May, the fund estimated an average deficit of 4 million barrels per day, leading nations like the U.S. to dip into their reserves.
Production outside the Persian Gulf was another. The U.S. stepped up output alongside Venezuela, Guyana and Russia, a factor meant to put a lid on crude price increases.
China played the third part. Holding the largest strategic oil stocks in the world according to the EIA, it drew down those reserves and paused most of its crude purchases, freeing up limited supplies for European and Asian nations.
U.S. reserves hit a 1983 low
The U.S. keeps its emergency stockpiles in four underground salt domes along the Gulf Coast, and those supplies are rapidly dwindling. They were just over half-full at 415 million barrels on February 27, a day before the conflict began, per the EIA.
By July 17, the reserves held only 311 million barrels, the lowest level since 1983. Gas prices are climbing again too, with the national average for a gallon reaching $4.11 on July 25, up from $3.99 a week ago, according to AAA Fuel Prices.
The next shock would hit a thinner market
The Strait of Hormuz once handled 20 million barrels of crude and refined products per day in shipping, and that flow remains largely halted, with one million barrels on average traveling through the strait in May, per the IMF.
Oil has climbed more than 20% so far in July, raising concerns that households could soon feel another wave of price increases. BlackRock expects the conflict to lift global inflation by roughly 0.8 percentage points. Traders are placing 68% odds that the Federal Reserve could respond with another rate hike as soon as September.
Sources: International Monetary Fund, Moneywise
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