An aerial-drone view of a crude-oil storage facility in Cushing, Okla. Crude inventories are at their lowest levels in years in the U.S. amid a war with Iran that’s dragged on for months.
There are growing worries that U.S. commercial oil inventories are too low for comfort as the war with Iran enters its fourth month far from a clear resolution – and a lot hinges on how much longer the conflict drags on.
Inventories are the shock absorbers of the energy world: They smooth out the tension between the ups and downs of supply and the usually steady pace of demand. To be an efficient cushion for countries and companies, however, stockpiles need to be at “Goldilocks” levels: not too much, not too little.
The on-again, off-again negotiations to end or pause the conflict have upended such calculations, as the uncertainty has made it difficult to determine ideal inventories. Instead, there’s nuance: U.S. commercial inventories may be adequate for now, but if the bulk of Middle Eastern oil supplies remains out of global reach for longer, then they could prove inadequate.
“It’s not an immediate concern, but that being said, I think the real concern is how and when this war is going to end. I don’t think anyone has a clear answer for that,” said Kevin Liu, an analyst with Bloomberg Intelligence. “Currently, you have a buffer getting close to not being a buffer anymore.”
U.S. inventories are divided into two piles. The first bucket is strategic reserves, controlled by Congress and by President Donald Trump. Continued drawdowns have left the U.S. Strategic Petroleum Reserve close to its lowest level in decades – and such draws are not stopping, since they are part of an agreed-upon international effort to keep a lid on crude-oil prices (CL00) (BRN00).
Then there are commercial inventories. Companies across the energy supply chain – be they producers, logistics and storage outfits, or refiners – hold reserves and report their stockpiles weekly to the U.S. government.
According to the most recent weekly data, commercial inventories fell by about 8 million barrels to 434 million barrels, about 3% below their five-year average for this time of year. The latest decline was steeper than analysts expected, as a survey by the Wall Street Journal estimated a drop by 3.3 million barrels in the week.
Combined, both U.S. strategic and commercial reserves are at their lowest level in more than 20 years, and drawdowns have stretched for a 10th week.
A ‘freakish’ amount of crude
Still, at least for now, the low inventories aren’t creating problems for U.S. oil producers and consumers, some experts say. While they don’t dispute that slimmer inventories may become a challenge if the conflict extends into the fall and beyond – and would be even more trouble for countries that are dependent on foreign oil – they point out that the U.S. is far from hurting for crude.
U.S. commercial inventories, which are at their owners’ sole discretion to distribute and sell as they see fit, were down to around 420 million barrels late last year and earlier this year without anyone batting an eye.
Oil markets were oversupplied last year through the start of the Iran conflict in February, so it made little sense for the U.S. to squirrel away too much crude.
During the crisis, energy markets have used complex workarounds that have helped the U.S. and the world “muddle through” the loss of Middle East crude, said Jan Stuart, global energy strategist at investment bank Piper Sandler. Inventories are part of that making do.
There are still more stockpiles from strategic reserves that are set to hit markets, as part of an International Energy Agency effort that started in March. Even after that is over, countries in the Organization for Economic Co-operation and Development would be left with about two-thirds of their reserves still in place and not yet committed to mitigate the crisis, Stuart said. They could choose to do more, he added.
“I think we can keep doing that for another few months. … If you’re talking about another couple of years, then we probably will have a problem at some point,” he said. A prolonged crisis and rising prices for crude and crude products would trigger more global inventory releases.
The U.S. in particular has many levers to pull, Stuart noted. Besides drawing more from its inventories, it could curb exports, especially if retail gas prices reach a pain point – be it $5 or $6 a gallon, but in any case more than the current national average of $4.22 a gallon – that could spur action in Washington.
“And the No. 1 [lever] is, we have a freakish amount of production,” he said.
America has been a net exporter of combined crude and crude products since 2020, and recently became a net crude-oil exporter. U.S. exports of crude and products such as gasoline, diesel and jet fuel have soared during the crisis, part of what has kept the world relatively well supplied despite the war with Iran.
In peacetime, about a fifth of the world’s oil and oil products transited through the Strait of Hormuz. Saudi Arabia and the United Arab Emirates have sent some of their crude through pipelines; a few laden oil tankers have been able to exit the Persian Gulf; and other workarounds have emerged to get some Middle East oil to global markets. Demand destruction is also a factor, particularly in Asia, which got most of its oil from the Mideast.
And the U.S., through fast-paced crude production and exports, is a big part of what’s been holding the line on global crude prices, which are now trading below $100 a barrel. Many had feared prices double that as the global energy market’s worst-case scenario – an essentially closed Strait of Hormuz – has now been playing out for nearly 100 days.
Tank bottoms at Cushing?
U.S. commercial stocks are held everywhere – in pipelines, in refineries, and in tanks belonging to midstream companies and exploration and production companies. The best-known storage hub, however, is in Cushing, Okla. (population: 8,390). That’s also the delivery point for West Texas Intermediate, the light and sweet oil grade that is the U.S. crude futures benchmark.
Some see a risk of hitting “tank bottom” at the Cushing hub. That’s when a tank gets so low that drawing hits dregs – an all-but-unusable mix of oil sludge and debris – before a physical bottom is reached. Tank bottoms at Cushing would be a wake-up call that inventories are dangerously low.
Commercial inventories in Cushing are now at 22.4 million barrels, their lowest since December, after hovering around 30 million barrels earlier in the Iran conflict. They have been lower than that in multiple instances recently, however – including in 2022, when inventories were strained after Russia’s invasion of Ukraine.
While it’s hard to quantify “tank bottoms,” that minimum typically ranges from 10% to 20% of tank capacity, depending on tank design and other factors, said Henry Hoffman, co-portfolio manager of the Catalyst Energy Infrastructure Fund.
As for Cushing storage levels, “it is difficult to pinpoint exactly where operational issues begin because of varying crude grades and tank configurations, but levels much below 20 million barrels are likely to create problems,” Hoffman said.
There again, immediate concerns may be largely overblown. Higher crude prices likely would emerge and cut down on demand, preventing inventories from hitting tank bottoms, Hoffman said.
“I don’t foresee a situation where you’d need to think about the bottom of the tank,” echoed Jaime Brito, executive director of refining and oil products at Dow Jones Energy.
A reduction in Cushing stocks is “nothing to be concerned” about, Brito said, particularly because the hub itself has taken a little bit of a backseat as the bulk of U.S. production has shifted to West Texas’s Permian Basin in recent years.
Permian production bypasses Cushing on its way to Gulf refineries and to export from the newly expanded Port of Corpus Christi through pipelines, which have also been expanded.
