Shrinking US strategic petroleum reserves (SPRs) and the European Union’s move to sharply limit its purchases of Russian oil are likely to exacerbate supply, leading to a sharp rebound in prices that hit a month-long low on Friday.
Analysts argue that a sustained drop in oil prices from more than $120 a barrel a few months ago to below $90 could easily reverse, with rapidly depleting global spare oil production capacity and a resurgence in economies triggering a quick rebound.
Shrinking US strategic petroleum reserves (SPRs) and a move by the European Union to sharply limit its purchases of Russian oil are likely to exacerbate supply, leading to a sharp rebound in prices that hit their lowest in months on Friday.
SPRs have shrunk to their lowest levels in nearly 40 years. Crude oil inventories fell by nearly 7.0 million barrels in the week to September 16, to 427.2 million barrels — the lowest since 1984, according to Oil Markets data. According to a report, this is the first time since 1983 that the SPR has held oil below commercial reserves. As of September 16, there were 430.8 million barrels of oil in commercial storage facilities.
U.S. benchmark oil prices fell below $80 a barrel on Friday for the first time since January, as traders grew increasingly worried that much of the world is headed for recession or already in one.
Oil prices have been rising for the better part of the past 12 months and accelerated sharply in February when Russia invaded Ukraine. West Texas Intermediate was down 5.0 percent at $78.74 a barrel, and global benchmark Brent fell 4.0 percent to around $86.15, according to data from the Energy Information Administration.
Analysts argue that thinning spare production capacity leaves a very small cushion to absorb possible supply-side shocks in the near term. Despite already economic slowdowns in many parts of the world, oil prices have not fallen as much as feared amid concerns of supply disruptions.
“The thin spare capacity cushion over the years has supported oil prices and will continue to be a bullish factor in the market, at least in the short term,” he said. Market analyst John Kemp argues that bringing global oil inventories back to the five-year average would require a serious slowdown in economic activity or an outright recession.
They point to the imminent impact of the EU embargo on Russian oil imports by sea on global oil supplies.
Analysts noted that neither OPEC+ nor the US could materially increase supply in the short term. Opec+ is estimated to be producing less than its target oil production of 3.6 million bpd.
“Oil inventories are low and effective global spare capacity is now about one and a half percent of global demand,” Saudi Aramco CEO Amin Nasser was quoted as saying by the media.
“But when the global economy recovers, we can expect demand to rebound further, removing some spare oil production capacity there. And by the time the world wakes up to these blind spots, it may be too late to change course,” he said, adding that years of underinvestment in oil and gas currently means little spare capacity. And reiterated the warning that tighter markets have brought in.
A consensus estimate of market experts is that oil prices will rise in the long term, especially if the war in Ukraine continues. Russia normally supplies approximately 10 percent of the oil consumed worldwide. As sanctions tighten, and Russia’s oil industry falls into disrepair due to a lack of Western technology, its production could drop significantly, limiting supply. They argue that a strong Chinese economy could push up prices.