JPMorgan: September as a Critical Juncture, Crude Oil Inventories Nearing Extremes, Strait of Hormuz “Will Reopen No Matter What”

JPMorgan’s commodities team recently issued a warning: although global crude oil inventories appear to be 8.4 billion barrels, only about 800 million barrels are truly available for use. As of April 23, about 280 million barrels had already been consumed, leaving only a little over 500 million barrels of remaining buffer. If the blockade of the Strait of Hormuz continues, OECD commercial inventories will reach their “operational minimum” in September this year, and at that point the global oil product circulation system will face a substantial risk of failure. The world may have no choice but for the strait to “reopen no matter what.”

The illusion of 8.4 billion barrels—what can truly be used is only 800 million barrels. In total global inventories, about 6.6 billion barrels are stored on land and 1.8 billion barrels are floating at sea. A large portion of inventories is “locked” by operating constraints such as pipeline fill requirements and the minimum liquid levels in storage tanks, making them unavailable for takeout at any time. The truly usable buffer is only about 800 million barrels, of which 280 million barrels have already been used to buffer the impact of the lockdown.

Inventory depletion is like peeling an onion—it becomes more painful from the outside in. The first layer, floating offshore inventories (18 billion barrels at the start of the year), has fallen by 140 million barrels over the past two months, at a pace of 2.7 million barrels per day. The second layer, land-based commercial inventories: OECD commercial inventories have fallen from 2.8 billion barrels as of February to about 2.72 billion barrels currently, with consumption accelerating to 2.2 million barrels per day in April. The third layer, strategic petroleum reserves: the combined release by the US, Japan, and South Korea is about 2.5 million barrels per day. The final layer is operational minimum inventory—this is the quantity that must be kept so pipelines and refineries can remain in operation, and it is almost never drawn down; once it is reached, the system starts to fail.

The operational minimum is the real red line. Hitting bottom on inventories does not mean there is no oil; it means there is insufficient circulation volume. When working inventories drop below a critical point, pipeline pressure falls, refineries cannot obtain oil in time, and near-month contracts get snapped up—causing the system to fail due to lack of smooth circulation. Historical data shows that OECD refined product inventories very rarely fall below about 35 days of forward demand (equivalent to about 1.6 billion barrels). The report estimates that if the blockade continues and demand destruction remains stable at 5.5 million barrels per day, OECD commercial inventories will reach this bottom line in September.

Demand destruction is being artificially suppressed. To prevent social unrest, governments in multiple countries subsidize oil prices, suppressing terminal price signals, which leads to demand destruction being smaller than it should be and inventory depletion occurring faster. If the subsidies continue, inventory bottoming out could happen earlier than September.

September: The Strait Will Reopen No Matter What. OECD commercial inventories are expected to begin approaching the pressure threshold starting in June and reach the bottom line in September. By then, the world will face a dilemma: either the strait reopens, or it falls into an “unprecedented energy collapse and global economic recession.” Analysts believe the strait will reopen before September not because of political consensus, but because reality does not allow any other outcome. From now until September, every week of blockade is compressing the safety margin, building more variables into oil prices.
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