Oil supplies may hit a breaking point if the Iran war lasts into June

By Myra P. Saefong

A 'healthy' level of oil in storage at the start of the year has helped to buffer the loss of oil exports, says J.P. Morgan

The world has already lost roughly 800 million barrels in oil exports during the Iran war through the end of April, according to the International Energy Agency.

The world started the year with healthy levels of oil in storage, offering a "shock absorber" to the estimated loss of 13 million barrels per day from the Iran war-driven closure of the Strait of Hormuz.

Yet that buffer - a crucial way to meet global oil demand so far - could start to buckle as soon as early June, according to strategists at J.P. Morgan.

Oil inventories in storage, which began the year at a healthy 8.4 billion barrels, have become the market's "primary balancing mechanism" for the oil shock that has followed the U.S.-Israel war on Iran, the strategists, led by Natasha Kaneva, said in a Thursday note. The below chart shows how quickly the situation could turn dire.

In other words, the balancing mechanism is being stressed by the conflict. Out of that 8.4 billion barrels in global inventories, J.P. Morgan strategists estimate that only 800,000 million barrels are "realistically available without pushing the system into operational stress."

Pushing the system to the brink isn't a good idea. "Like blood pressure in the human body, the issue is circulation," the strategists wrote. Pipelines lose "pressure flexibility," terminals cannot load efficiently, refiners struggle to secure the right grades on time and traders bid aggressively for nearby supply, they noted. The system can fail if the circulation network "no longer has enough working volume."

And global oil supply losses have been mounting. The world is expected to have lost roughly 800 million barrels in exports due to reduced production and energy-infrastructure damage caused by the war through the end of April, according to the International Energy Agency.

In an April report, the IEA said overall losses in oil exports exceed 13 million barrels per day. Associated production curtailment and damage to energy infrastructure in the Persian Gulf region resulted in cumulative supply loss of over 360 million barrels per day in March, and 440 million barrels per day is projected for April, it noted.

Still, during prolonged disruptions, lower demand can help offset the need to draw from inventories in storage, so those inventories could last much longer, said strategists at J.P. Morgan. That would happen, however, "at the cost of reduced consumption, lower refinery runs and a broader economic slowdown," they added.

J.P. Morgan estimates that observable global oil demand fell by an average of 2.8 million barrels per day in March and is tracking a larger decline of 4.3 million barrels per day so far in April. Demand losses could deepen to around 5.5 million barrels per day in May.

Despite the estimated magnitude of the demand pullback, commercial inventories for the group of industrialized nations known as the Organization of Economic Co-operation and Development (OECD) are still on track to "approach operational stress levels" by early June, strategists at J.P. Morgan said.

By September, if the Strait of Hormuz remains closed and assuming demand destruction stabilizes at 5.5 million barrels per day, J.P. Morgan estimates that OECD commercial stocks could fall to their "operational floors," which means they would reach their minimum levels for operation.

Prices for the front-month June Brent futures contract (BRNM26), which expires at the end of Thursday's session, were trading at $114.38 a barrel. On Wednesday, they settled at the highest level since March 31. The soon-to-be front-month July contract (BRN00) (BRNN26) was at $110.23 in Thursday dealings.

-Myra P. Saefong

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04-30-26 1317ET