The global oil market is gradually losing the reserve mechanisms that had helped cushion price spikes in past crises. CNBC reports that traders are increasingly pricing in the risk of a sharp reduction in Middle East supplies, leading analysts to say oil is unlikely to fall below $100 a barrel in the near term.
Tensions rose after Saudi Arabia’s East-West pipeline was shut, putting roughly 4 million barrels a day of supply at risk. Prices are also being pushed higher by renewed military action between the US and Iran, the advance of Iran-backed Houthis along the Red Sea coast and new attacks against Saudi Arabia.
According to Janiv Shah, vice president for oil markets at Rystad Energy, the widening Middle East conflict is already adding an extra risk premium to oil prices. He said the disruption to the East-West pipeline has created another serious constraint for the market.
Shah added that the market’s relatively muted reaction suggests investors still expect Saudi Arabia’s inventories to help maintain export volumes. But if supply disruptions last longer than the five to seven days those reserves are meant to cover, conditions could shift quickly.
Brent crude futures rose 0.6% to $106.29 a barrel and are up more than 21% over the past month. US West Texas Intermediate (WTI) futures gained 1.2% to $102.61 a barrel, bringing their one-month increase to more than 25%.
Historically, large global stockpiles of crude and refined products have acted as an important crisis buffer, helping restrain price surges. Analysts now warn, however, that this cushion is shrinking rapidly amid the ongoing conflict in the Middle East.
Paul Gooden, head of natural resources at investment firm Ninety One, said global inventories have already fallen by about 1 billion barrels, while the market still has roughly 1 billion barrels of remaining “room to maneuver.” In his view, as long as the Strait of Hormuz remains closed, the oil shortfall will deepen and the risk of further price increases will keep rising.
