🇮🇳🇨🇳🇮🇷 Three ships, two Chinese and one Indian, crossed the Strait of Hormuz through the Iranian toll booth in the last hours.

@CIG_telegram

🇺🇸🛢 The most visible oil inventories are about to plummet

Several things need to be noted first before looking at tanker data:

We are still offloading some of the tankers inbound laden with crude. These are temporarily keeping US crude imports elevated. The same VLCCs discharging crude turn into export volumes in 1-2 weeks.

We have an armada of empty VLCCs headed for the US, which will drain US commercial crude inventories dry.

All the while, we will continue to drain product inventories in the US. Petroleum product exports are expected to remain near all-time highs.

The snapshot above is our preliminary US crude storage estimate for next week, which includes 7.1 million bbls from the SPR. The final SPR release figure could be higher next Monday, so we will have finalized estimates out by then.

What’s not shown above is what happens to US commercial crude storage when 1) US refinery throughput ramps up to 16.8 to 17 million b/d and 2) US crude imports fall to 5.5 million b/d due to lower inbound crude flows.

The net impact on US commercial crude inventories by the middle of May is as high as 12 million bbls.

In essence, there could be EIA oil storage reports showing -10 to -12 million bbls of crude WITH a SPR release of 10 million bbls. This would put the cumulative crude draw at 20 to 22 million bbls.

And since I’m a numbers guy, let’s just say this. Since EIA started publishing the weekly oil data in 1982, there have been 41 weekly crude draws of over 10 million bbls. The largest ever recorded crude draw (commercial + SPR) was on the week of July 28, 2023, and this week’s EIA oil storage report (-13.355 million bbls) already ranks as the 6th largest crude draw in history.

I guess we are really doing this. We are really going to just watch the Strait of Hormuz stay closed, and onshore oil inventories plummet. US product storage is already approaching seasonal lows for this time of year, and the next few weeks will push us into brand-new territory.

I still see commentary about comparisons to 2022. The absurdity of those comments fails to recognize that this is not even remotely similar.

🔗 https://www.hfir.com/p/public-memo-i-cant-believe-we-are

🛢 JP Morgan: Oil Flash Note: The Illusion of Plenty

In this war-driven oil shock, inventories have become the market's primary balancing mechanism. Unlike a typical disruption where spare production capacity can be mobilized quickly, the location of the shock and the scale of the supply losses mean the immediate adjustment comes from barrels in storage. Inventories are acting as shock absorbers of the global oil system.

Of 8.4 billion barrels held in storage, 6.6 billion are onshore and 1.8 billion are offshore. Some of the offshore barrels are simply in transit from producers to customers, others — such as Russian or Iranian crude — effectively function as floating storage. By type, 5.2 billion are crude while 3.2 billion are refined products. Visibility varies wildly. OECD inventories are among the most transparent because member countries maintain strategic reserves, collect standardized data and publish timely statistics. Much of the world is less visible, particularly in developing countries. China is a notable exception where inventories are estimated to be around 1.3 billion barrels.

Finally it is important to distinguish between Strategic Petroleum Reserves — state-controlled emergency barrels — and commercial inventories which are privately held stocks used in normal course of trade and refining.

Even so, not every barrel can be withdrawn. Of the 8.4 billion barrels in storage, we believe that, realistically, only 0.8 billion barrels can be withdrawn without pushing the oil system into operational stress. As of April 23rd, roughly 280 million barrels have been consumed to cushion the impact of the 3rd Gulf War. On paper that suggests a comfortable buffer. In practice, the picture is more complicated. Floating storage can be tapped quickly but only a slice of onshore storage — around 580 million barrels — is readily accessible. The rest is effectively locked up in pipeline fills, minimum tank levels and other operational constraints.

This is why inventory floors matter. A market can hold millions of barrels and yet become fragile once working stocks fall too low. Like blood pressure in the human body, the issue is circulation. Pipelines lose flexibility, terminals cannot load efficiently, refiners struggle to secure the right grades on time and traders bid aggressively for the nearest supply. The system does not fail because oil disappears, it fails because the circulation network does not have enough working volume. Same principle applies to refined products.

In a prolonged disruption scenario, demand is rationed well before inventories approach critically low levels. In theory stocks can last much longer but only at the cost of reduced consumption, lower refinery runs and broader economic slowdown. As a result full drawdown of global oil inventories is unlikely.

Like an onion, oil inventory draws happen in layers. The sequence is determined by speed of access, economic cost, political willingness and logistical ease, not by who has the most barrels. The order is:

🔶 Oil-on-water and floating commercial stocks

🔶 Commercial onshore stocks

🔶 Strategic Petroleum Reserve

🔶 Demand destruction replaces inventory draws (the pivot)

🔶 Operational minimum stocks

OECD commercial stocks could fall to the operational minimum floor by September if the Strait of Hormuz is not reopened assuming demand destruction stabilizes at 5.5 mbd.

@CIG_telegram