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The oil market is four weeks away from a “tipping point” that will drive prices significantly higher, traders have warned, as the blockade in the Strait of Hormuz reduces global stockpiles below critical levels.
Markets are beginning to price in the chances of a much longer conflict, after President Donald Trump told oil company executives on Thursday that the blockade of the Strait of Hormuz could “continue for months”.
Traders and analysts warned that global stocks of crude, gasoline, diesel and jet fuel will hit critically low levels by the end of May, at which point prices will escalate rapidly.
“We do not have months,” said Frederic Lasserre, head of research at Gunvor, one of the world’s largest oil traders. He warned there will be “huge pain” as economies have to stop using fuel. “It goes beyond gasoline at the pumps to industry shutting down and you enter recession.
“The tipping point is clearly June,” he added. “This is the point at which something has to give.”
Amrita Sen, founder of consultancy Energy Aspects, said that if the war continues until the end of June all stocks would be exhausted. “Essentially you can pick a number when it comes to the oil price. We will just not have any buffers.
“The repricing is from today onwards. We expect significant upside to both crude and products,” she added, suggesting the futures price of Brent, the international benchmark, could climb to $150 to $200 a barrel.
Brent shot to a four-year high above $126 a barrel this week, amid highly volatile trading as contracts linked to June deliveries expired. The price was back below $110 on Friday, based on the July futures contract.
Many market participants expected a shorter war when the conflict erupted at the end of February. They have since been forced to readjust their expectations.
“We may be on the cusp of a sentiment shift as people are starting to realise that the US messaging may not represent reality,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.
She added that if the blockade continues throughout May, oil prices could surpass 2022’s high of just below $140 a barrel.
“From the start, the White House has been very successful in messaging that this would be a short war, and now it looks like something that could be sustained through the summer,” she said.
Lasserre warned high prices would force industries to either pay or shut down, and that once economies go into recession it would take months “before you can expect your economic momentum to be positive again”, even if energy flows resume through the Strait of Hormuz.
Price rises in energy markets have been relatively contained so far because there were significant reserves of crude when the war began. Higher prices have also pushed some Asian countries to cut back on their consumption, and refineries have prioritised the most needed fuels.
“We had these buffers for the first two months,” said one executive at a large commodity trader. “Refineries were able to switch the products that they were making because of the time of year. They really maxed out their jet fuel and diesel production.”
But the latest weekly data from the US Energy Information Administration showed a significant fall in stock levels, even as the US Strategic Petroleum Reserve released 1mn barrels of oil a day into the system.
According to the Energy Information Administration, US gasoline stocks fell to 222mn barrels on April 24, their lowest for this time of year in more than a decade. “When the US gasoline inventories cross 210mn barrels, it gets interesting,” said the trading executive. “We’re almost there now so you will start to see parts of the market really bend.”
The data is ominous as the US summer driving season approaches. “We’ve been in a shoulder season and working off strategic petroleum releases, but now we are moving right into the danger zone when it comes to the peak summer demand season,” said Croft.
Data visualisation by Alan Smith