Bernstein Energy: How much longer can oil inventories last?

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Bernstein Energy: How much longer can oil inventories last?

ng resolution to the underlying conflict. Despite the geopolitical backdrop, oil prices have remained

relatively muted so far. The key reason is that OECD commercial inventories have declined by only 116MMbbls despite a

cumulative supply loss of approximately 1.54bn barrels since the conflict began. The market has instead been balanced

through a combination of demand destruction, SPR releases, and a remarkable reduction in Chinese imports, which are now

roughly 50% below pre-conflict levels. These buffers are not inexhaustible, however. The 400MMbbl emergency SPR release

is likely to be fully utilized by September. While additional releases are possible, they would likely extend only to year-end

before inventories approach minimum operating levels. China faces a similar constraint. At current drawdown rates, its crude

inventory coverage could fall below 60 days of demand by year-end, materially reducing its ability to continue absorbing the

disruption. Taken together, this suggests oil prices are likely to continue trending higher as long as the Strait remains disrupted,

with the risk of a significant upward move once SPR releases and Chinese inventory buffers become increasingly depleted.

Given that markets are forward-looking, this adjustment could occur sooner than many anticipate. Of course, if these risks are

apparent to us, they are also likely apparent to policymakers, who may ultimately seek to change course. How that happens,

however, remains difficult to assess given the wide gap that still exists between Iran and the US. Against this backdrop, oil

price forecasting remains challenging. Nonetheless, we believe an average Brent price of US$90/bbl this year is a reasonable