Inventories are performing because the shock absorber of the worldwide oil system, J.P. Morgan analysts, together with Natasha Kaneva, J.P. Morgan’s head of world commodities technique, mentioned in a report despatched to Rigzone by Kaneva on Thursday.
“On this battle pushed oil shock, inventories have change into the market’s major balancing mechanism,” the analysts mentioned within the report.
“In contrast to a typical disruption the place spare manufacturing capability may be mobilized shortly, the placement of the shock and the dimensions of present provide losses imply the speedy adjustment has to come back from barrels already in storage,” they added.
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The analysts famous within the report that the disaster started with shares in comparatively robust form.
“International inventories surged in 2020 and 2021 in the course of the Covid demand collapse, then drew sharply by 2022 and 2023 as economies reopened, Russia invaded Ukraine, and markets tightened,” they highlighted.
“That tightening part reversed in 2024 and 2025, when provide as soon as once more outpaced demand, permitting shares to rebuild. In consequence, the world started 2026 with a wholesome 8.4 billion barrels in storage,” they added.
Of that 8.4 billion barrels, roughly 6.6 billion are held onshore, with one other 1.8 billion afloat, the analysts highlighted within the report.
“Among the floating barrels are merely in transit from producers to customers, others – akin to sanctioned Russian and Iranian crude – successfully perform as floating storage,” they identified.
“By sort, about 5.2 billion barrels are crude, whereas 3.2 billion are refined merchandise,” they added.
The analysts additionally revealed that visibility varies extensively.
“OECD inventories are among the many most clear as a result of member international locations keep strategic reserves, gather standardized knowledge, and publish well timed statistics – giving OECD shares an outsized position in worth formation,” they mentioned.
“A lot of the remainder of the world is way much less observable, significantly throughout the creating world. China is the notable exception, the place we estimate inventories started the yr close to 1.3 billion barrels,” they added.
The J.P. Morgan analysts additionally famous within the report that “you will need to distinguish between Strategic Petroleum Reserves – state-controlled emergency barrels – and business inventories, that are privately held shares used within the regular course of commerce and refining”.
They went on to warn within the report that not each barrel may be drawn.
“Out of the 8.4 billion barrels in world inventories, we estimate solely 0.8 billion barrels are realistically accessible with out pushing the system into operational stress,” they mentioned.
“As of April 23, roughly 280 million barrels have already been consumed to cushion the affect of the battle,” they added.
“On paper, that also suggests comfy buffers. In follow, the image is extra difficult,” they revealed.
“Floating storage may be tapped shortly, however solely a slice of onshore inventories – round 580 million barrels – is instantly accessible. The remainder is successfully locked up in pipeline fills, minimal tank ranges, and different operational constraints,” they warned.
The J.P. Morgan analysts acknowledged within the report {that a} market can nonetheless maintain a whole bunch of tens of millions of barrels and but change into fragile as soon as working shares fall too low.
“Like blood stress within the human physique, the problem is circulation,” they mentioned.
“Pipelines lose stress flexibility, terminals can not load effectively, refiners wrestle to safe the appropriate grades on time, and merchants bid aggressively for close by provide,” they highlighted.
“The system doesn’t fail as a result of oil disappears, it fails as a result of the circulation community now not has sufficient working quantity,” they warned.
The J.P. Morgan analysts went on to state within the report that, in a protracted disruption situation, demand is rationed properly earlier than inventories strategy critically low ranges.
“In principle, shares may final for much longer – however solely at the price of lowered consumption, decrease refinery runs, and a broader financial slowdown,” they mentioned.
“In consequence, a full drawdown of world inventories is neither possible nor possible,” they added.
The analysts famous that, “like an onion, stock attracts occur in layers”.
“The sequence is decided by velocity of entry, financial price, political willingness, and logistical ease, not by who has probably the most barrels,” they mentioned.
“Simple barrels are peeled first, strategic barrels later, crucial barrels hardly ever. The deeper the draw, the upper the worth and the financial price of every extra barrel withdrawn,” they identified.
The analysts outlined within the report that the primary layer of this onion is oil on water and floating business shares. The second layer is business onshore shares and the third layer is strategic petroleum reserves, in response to the analysts, who highlighted within the report {that a} pivot comes as demand destruction replaces stock attracts.
“Properly earlier than the system is emptied, excessive costs start to ration demand,” the analysts mentioned.
“Customers drive much less, business cuts runs, airways trim schedules, and refiners scale back throughput,” they added.
The went on to warn within the report that, “given the magnitude of the demand pullback, our steadiness now suggests OECD business inventories are on monitor to strategy operational stress ranges by early June”.
The J.P. Morgan report went on to stipulate that operational minimal shares are usually the final barrels drawn, and added that, in follow, these are intentionally prevented.
“Pipeline fill, tank bottoms, linepack equivalents, minimal terminal inventories, and the product shares required for day-to-day continuity are hardly ever accessed, as a result of drawing them materially will increase the danger of operational disruption and broader system instability,” they warned.
“On our estimates, OECD business shares may fall to those operational flooring by September if the Strait of Hormuz stays closed, assuming demand destruction stabilizes at 5.5 million barrels per day,” they added.
In a launch posted on its web site on March 11, the Worldwide Power Company (IEA) introduced that its member international locations would perform their “largest ever oil inventory launch amid market disruptions from Center East battle”.
“The 32 member international locations of the Worldwide Power Company unanimously agreed immediately to make 400 million barrels of oil from their emergency reserves accessible to the market to handle disruptions in oil markets stemming from the battle within the Center East,” the discharge acknowledged.
In its newest oil market report on the time of writing, which was launched in April, the IEA projected that world oil demand would contract by 80,000 barrels per day this yr, because the Iran battle “upend[ed]” its world outlook.
“That is 730,000 barrels per day lower than in final month’s report and a forecast 1.5 million barrel per day 2Q26 decline can be the sharpest since Covid-19 slashed gasoline consumption,” that report acknowledged.
“Initially, the deepest cuts in oil use have come within the Center East and Asia Pacific, primarily for naphtha, LPG and jet gasoline. Nevertheless, demand destruction will unfold as shortage and better costs persist,” it added.
To contact the writer, e-mail andreas.exarheas@rigzone.com
