Extra Oil Supplies Scarce as War Winds Down

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Written by Daniel Graeber for IIR News Intelligence (Sugar Land, Texas)

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Summary

Energy markets are in retreat as the details of a 14-point memorandum of understanding between Iran and the United Staes circulates. Supply-side buffers are scarce, however, in part due to the release from emergency stockpiles.

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U.S. Commercial Oil Stocks Draw Down for 10th Straight Week

As crude oil prices move further away from wartime highs as details of a truce emerge, supply-side buffers continue to dwindle, with U.S. oil stockpiles falling for the 10th week in a row, U.S. federal data show.

Industrial Info in its weekly report on crude oil inventories and refineries found that outages in the Middle East triggered by recent conflict were ebbing. Unplanned outages last week knocked offline around 2.49 million barrels per day (bpd), compared to 2.57 million bpd during the seven-day period ending June 5.

That comes as details about a 14-point memorandum of understanding between the United States and Iran emerge. A formal signing ceremony is planned Friday in Geneva, but the document already has the signatures from U.S. President Donald Trump and Iranian President Masoud Pezeshkian.

Conflict that began in late February with U.S.-Israeli airstrikes on Iran has led to one of the most severe energy crises in modern memory, with the closure of the Strait of Hormuz blocking around 20% of the world's waterborne crude oil and liquefied natural gas (LNG). The crisis sent a shockwave across the global economy, driving up inflation and limiting food security because of the impact on fuels-derived fertilizers.

Under the terms of the deal, Iran will use its "best efforts" to ensure safe passage with no tolls for a 60-day period. Elsewhere, Iran is freed from various sanctions, receives $300 billion in reparations and can start putting its crude oil on the global market. Nuclear issues are largely set aside for future negotiations.

Brent crude oil prices on Thursday were moving further away from the $80 mark, after jumping above $115 per barrel during the height of the conflict. Brent at the start of trading on Wall Street was down 2.5% from the prior session to trade near $77.50 per barrel.

The Damage is Already Done

Vessels, meanwhile, are making it through and markets are breathing a sigh of relief, but lagging economic indicators suggest full recovery will take some time, according to the International Energy Agency (IEA).

The IEA already has expressed concerns about supply-side buffers as inventories in the advanced economies are at their lowest level since December 1990. On Wednesday, the U.S. Energy Information Administration reported that domestic crude oil inventories were depleted for the 10th straight week.

Over the seven-day period ending June 12, U.S. commercial crude oil inventories declined by 8.3 million barrels to move 6% below the five-year average for this time of year. Catering to IEA calls early in the conflict to tap member-state strategic stockpiles, supplies in the U.S. Strategic Petroleum Reserve (SPR) were at 340.3 million barrels during the week, down 2.5% from the prior seven-day period.

The U.S. SPR is about halfway depleted, leaving little room to support a market should fighting resume or another issue emerge. Industrial Info is monitoring what's left of Tropical Storm Arthur, which made landfall in Texas on Wednesday afternoon. The storm has dissolved largely to a rain event, and while it's expected to be a mild hurricane season, it only takes one major storm to upend energy operations along the U.S. Gulf Coast.

By the Numbers

• 2.49 million barrels per day offline in the Middle East last week
• $77.50-per-barrel Brent on Thursday some 30% below war-time peak

Key Takeaways

• Market might not be able to handle another supply-side shock this year
• U.S. commercial stockpiles are 6% below the five-year average for this time of year

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