Oil prices have cooled recently amid optimism that a U.S.-Iran deal could reopen the Strait of Hormuz, with Brent crude trading around $90 a barrel.
Brent had previously surged above $110 a barrel in mid-May, and while it remains up more than 50% on the year, it nearly doubled at one point.
The Strait of Hormuz closure has triggered the biggest oil supply disruption on record, with Persian Gulf oil production plunging by more than 50%.
The global economy has been forced to tap emergency stockpiles to bridge the supply gap, including national reserves such as the U.S. Strategic Petroleum Reserve.
According to a Goldman Sachs estimate, the world is burning through a record 8.7 million barrels per day from global stockpiles, with total supply losses exceeding 1 billion barrels since the war began.
Chevron (NYSE: CVX) CEO Mike Wirth warned at a recent conference that “the buffers and the shock absorbers are being steadily drawn down, and the ability for the market to absorb this imbalance is drastically diminished today versus where we started.”
U.S. commercial crude inventories ended last week at 441.7 million barrels, roughly 2% below their five-year average, while the Strategic Petroleum Reserve has fallen to 365.1 million barrels from 415.4 million barrels before the war.
ExxonMobil (NYSE: XOM) senior vice president Neil Chapman warned at the same conference: “We’re approaching unheard of inventory levels.”
Chapman further cautioned that “you can debate whether that’s going to hit, those really low levels, in two weeks or three weeks — once you get to that point, then you’ll see the price shoot up.”
Chevron’s Wirth echoed that sentiment, stating: “Over the next few weeks, we’re likely to see those pressures flow through more directly to physical prices, and there’s more upward pressure that I would expect as we get into June and certainly into July.”
Chapman speculated that once inventories reach all-time lows, Brent crude could skyrocket to between $150 and $160 a barrel, surpassing its all-time high.
JPMorgan previously cautioned that Brent could spike above $150 if Strait of Hormuz supplies remained disrupted through mid-May, adding further weight to the warnings from oil majors.
Goldman Sachs modeled a severely adverse scenario where crude prices could top $140 a barrel if the Strait does not fully recover by the end of July and supply restoration faces additional complications.
The U.S. and Iran are reportedly close to a deal that would fully reopen the Strait of Hormuz within 30 days, which could prevent the worst-case inventory scenario from materialising.
If the Strait does not reopen in time, surging oil prices would likely cause demand destruction and drive a meaningful slowdown in the global economy.
Investors are being advised to monitor the oil market closely, as a resurgence in prices could trigger a global recession and a stock market downturn in the coming months.
Taking a more defensive portfolio posture and holding oil stocks such as ExxonMobil (XOM) and Chevron (CVX) is being flagged as a potential hedge against escalating energy market risk.
