The countdown to a major oil price surge has begun, and the signs are everywhere. In the coming weeks, we'll witness the emergence of two rarely used phrases in oil market narratives: 'operational minimum' and 'tank bottoms'. These terms signify the rapid depletion of oil inventories and the impending price spikes due to the loss of oil supplies from the Persian Gulf, following Iran's closure of the Strait of Hormuz. This maritime artery, once a conduit for 20% of the world's oil, is now closed, and the consequences are far-reaching.
The global economy had a four-month buffer of oil inventories, akin to a savings account, at the beginning of March. We're now drawing down these reserves at an alarming rate, making up for the loss of oil and oil products from the Persian Gulf. A recent analysis suggests that the world oil system will start experiencing 'operational stress' in June, where price volatility becomes extreme, rationing begins, and supply chain management becomes a delicate tightrope walk. Another analyst believes we have a few more weeks before this stress manifests.
Oil executives are sounding the alarm, with one senior executive at ExxonMobil stating that they're approaching 'unheard of inventory levels'. The Trump administration has been assuring the public that the war with Iran will soon end, but this jawboning has kept oil prices stable, with traders confident that markets will return to normal. The price for West Texas Intermediate crude oil for a year from now is around $75 per barrel, only $8 above its pre-war level.
However, the real issue lies in understanding 'operational minimum'. While there appear to be billions of barrels of oil left, most are 'system fill' in pipelines, refineries, and tankers. The absolute operational minimum floor for the global oil system is estimated at 6.8 billion barrels. On our current trajectory, we'll reach this point in September, if not before. This means that the 8.5 billion barrels of available oil inventories at the beginning of the war were an illusion, as only 1.7 billion were truly available.
The moment we reach 'tank bottoms' is when practical commercial storage runs low, and a bidding war begins, likely driving oil prices to $150 per barrel or higher. This moment is not far off, even as the world sleepwalks through the greatest oil crisis in history. The evidence of this sleepwalking is seen in the oil futures market, where West Texas Intermediate oil settled at $90.54 per barrel on July 31, well after the expected arrival of 'tank bottoms'.
An agreement to end the Iran war soon would not change the outcome, as it would take months to normalize traffic through the Strait of Hormuz. The closure of this strait for a few more months will likely lead to a more conservative price estimate of $150 per barrel. The world economy is about to hit a wall with regard to oil supplies, and the implications are profound.
