There are no visible exit ramps. There was a reason why oil prices strengthened last week. Seemingly unable to succeed on the military front, the US announced fierce economic sanctions against Iran and any other country that supports it. Should the pledged embargo be launched, oil supply from the region will fall. Firstly, the volume of Iranian oil currently slipping through the US naval blockade will inevitably decline. Secondly, retaliatory measures against regional oil installations must not be ruled out. It was only a few months ago that the US successfully alleviated an acute supply shortage by, among other measures, granting a sanctions waiver for Iranian oil. With elevated US retail gasoline and diesel prices causing discontent among motorists, the planned economic warfare is perplexing, to understate the US rationale. The major oil futures contracts ended the week 5%–6% higher but are correcting southward ahead of the US unveiling its sanctions, reportedly today.

The direction of travel, because of growing anxiety over inflationary pressures, was the opposite for equities and bonds. The midweek announcement by the US Treasury chief of increased bond purchases brought only temporary relief. Global and US stock indices all produced negative returns for the week, and the 30-year Treasury bond closed at 5.27%, a hop, skip, and a jump from the 19-year peak of 5.34% reached last Tuesday. Over the weekend, a new front opened in the trade war between the US and Canada. After negotiations broke down, the Canadian Prime Minister declared that his country was ‘at war’ with the US over trade and promised to match US tariffs ‘dollar for dollar’. There will be economic pain on both sides. The US is fighting seemingly forever wars in the Middle East and now, closer to home, to the apparent benefit of no one.
 

Additional Demand Layer

The oil market has absorbed the daily loss of several million barrels of oil with remarkable resilience and adaptability over the past six months. One of the major factors was the comfortably sufficient level of global stocks at the end of February, which Energy Intelligence (EI) put at 9.7 billion bbls, a record high covering more than three months of worldwide consumption. These inventories have gone a long way towards cushioning the blow precipitated by the Iranian crisis. The utilisation of oil inventories has taken two directions: commercial (individual) and strategic (collective). The result has been the same, nonetheless: oil inventories across the globe have been depleted.

Global stocks, EI reckons, will have plunged from the aforementioned 9.7 billion bbls to 8.8 billion bbls by the end of this month, although this remains reassuringly adequate. Total OECD commercial oil inventories, the EIA estimates, will have fallen from 2.82 billion bbls in February to 2.58 billion bbls in August, with further thinning anticipated throughout 2026. Within the developed part of the world, US industrial stocks will have declined from 1.27 billion bbls to 1.22 billion bbls over these six months. And lest we forget China, which, having cut its crude oil imports by 5 mbpd and drawn on its domestic inventories at the height of the conflict, contributed greatly to calming frayed nerves.

OECD countries also swung into harmonised action as the IEA announced the release of 400 million bbls from strategic oil reserves in March. The US, as the world's largest consumer and producer, was responsible for the lion's share of the release: 172 million bbls. As illustrated in the accompanying chart, although it has, for the time being, fallen short of fulfilling its task in its entirety, the 123 million bbls of SPR drawdown to date has been almost exclusively responsible for the decline in total US crude oil inventories.

The terms and conditions of the latest US SPR release are quite idiosyncratic. It is not a cash sale but a structured oil exchange, which comes at no cost to the US taxpayer. Whenever the borrowed oil is returned, it will be with an additional volume, using a multiplication factor of 1.25. Because it is an exchange, the timing of the replenishment is not price-sensitive; it could take place with WTI at $50/bbl or $100/bbl.

When will it occur, and to what extent? The US energy secretary vaguely hinted at filling the SPR to above 500 million bbls, without specifying a timeframe. Yet whenever the replenishment begins, additional demand will be created. Arbitrarily assuming the replacement of around 250 million bbls over, say, two years, 340,000 bpd of crude oil will flow back into the emergency reserve. With oil being a truly global commodity, the impact on outright oil prices will probably be negligible, but it will support the structure of the US crude oil benchmark and the differentials of domestic grades to their international peers.

Overnight Pricing