The drop in global crude oil inventories has started impacting oil prices as demand outweighs supply cuts from OPEC leader Saudi Arabia to provide support for oil prices.
JP Morgan analysts said this month that oil inventories – which include crude and fuel products – now play a bigger role in determining oil prices than the U.S. dollar because Western sanctions on Russia have accelerated oil trading in other currencies.
“We expect stocks to draw relatively aggressively in July, and by the end of August, we should be through the stock builds that we saw in the first half of the year,” said Christopher Haines, an analyst at Energy Aspects.
“We are on the cusp of supply tightness. Saudi cuts are essentially accelerating the timeline.”
Both the International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) expect oil demand to outpace supply this year, leading to overall inventory draws to the tune of 400,000 to 500,000 barrels per day (bpd), mostly accounted for by the second half of the year.
Although global oil inventories increased in May to their highest since September 2021, according to the IEA, driven by a substantial rise in non-OECD countries, analysts say signs of tightness are appearing, in the United States in particular.
Stock declines have been geographically uneven so far, with inventory falls in the United States and Europe offset by increases in China and Japan.
The declines have also been skewed more towards fuel than crude, although the supply of sour crude, typically priced lower than sweet crude, has tightened because of the cuts introduced by OPEC and its allies.
“It appears that the voluntary cuts announced by eight OPEC+ countries in April plus the additional 1 million bpd of unilateral Saudi cut that just started in July are having the desired effect, with sour barrels becoming more scarce,” the JP Morgan analysts said.
Refineries running harder to meet rising summer demand as people drive and fly more partly explains the fall in inventories, the bank said, along with a drop in Russian oil exports this month.
The bank expects benchmark Brent prices , which traded around a three-month high of $84 a barrel this week, to rise to $86 a barrel by the end of the third quarter, before easing in the fourth quarter as inventories start to build again.
UBS said it expected a rise to $85-$90 a barrel over coming months.
Crude stocks at the Cushing storage hub in Oklahoma fell by 2.9 million barrels in the week to July 14, the steepest draw in more than a year and a half according to the U.S. Energy Information Administration (EIA), and shed a further 2.6 million barrels the following week, leaving them well below their five-year average.