Depleted Oil Inventories: Energy Inflation Just Starting

Shutdowns, Depleted Inventories, and Fading Shale Growth Point to Sustained Oil Strength

Three charts currently paint a clear picture for oil markets. Strategic Petroleum Reserves and Commercial Supplies have crashed (oil safety net is in danger territory): 

18% of of the world’s energy passes through the Straight of Hormuz. Tanker crossings have crashed for months and months, which is why the Strategic Reserves have crashed (and has caused non-energy casuals the lack of concern since there has been supply, which should be very concerning and will be soon):

Even if the Straight of Hormuz 100% opened tomorrow (it won’t), it would take months for tanker crossings to normalize and oil flows to get through its 90 day supply chain to its end destinations. This means the drainage of our Strategic Reserves will get even more perilous, regardless of when the Straight re-opens (no signs of it).

Last but not least, and what the world is really sleeping on: 90% of all non-OPEC supply growth has come from the U.S. Shale. FMT is calling it: U.S. Shale growth has seen its best days and the only basin that was growing is grinding to a crawl, and might show zero oil growth going forward:

So, tanker traffic through the Strait of Hormuz has grounded to a halt. Global inventories—combining commercial stocks and strategic petroleum reserves—sit at dangerously low levels to offset the loss of Hormuz supply. And U.S. shale, the primary source of non-OPEC production growth since 2016, is trending toward zero incremental growth.

Even if the Strait reopened tomorrow, the physical and logistical realities would not reverse overnight. The Strategic Petroleum Reserve and commercial inventories have already been drawn down significantly. Rebuilding those barrels requires a couple years (as of current numbers) of uninterrupted supply-chain flows—tankers, refining capacity, and distribution networks that cannot simply switch back on. In the meantime, the market remains extremely tight (crack spreads just hit all time record highs, a lot more inflation is coming).

That tightness is reinforced by the longer-term production picture. The era of rapid U.S. shale growth that offset much of the non-OPEC supply gap is fading. With incremental barrels from shale approaching flat, the market has fewer buffers against geopolitical or operational disruptions.

On top of this, governments that have drawn down strategic stocks will eventually move to refill them. Those purchases add another layer of demand precisely when inventories are already low, creating further upward pressure on prices.

Historically, elevated energy prices have often coincided with weaker broader equity markets. Oil prices could absolutely skyrocket, and not give the market any time to adjust. In that environment, a long energy position has frequently served as both a portfolio hedge and a source of absolute, huge returns. The current combination of  near zero Hormuz flows, critically low inventories, and diminishing non-OPEC growth keeps the bias firmly bullish for oil—and positions energy as one of the more asymmetric opportunities available.

Best Regards,
Nicholas Green