World oil inventories falling fast towards hard operational floor

Published: 2026-05-11 11:10:06 ET GS

Published on 05/11/2026 at 11:10 am EDT

The world's oil buffer is disappearing faster than at any point in recorded history. Two months into the near-closure of the Strait of Hormuz, global inventories are drawing down at a pace that has already exceeded the previous quarterly record — and the investment banks tracking the depletion are warning that the market is approaching a threshold where the question shifts from price to availability.

Morgan Stanley estimates global oil stockpiles dropped by about 4.8mn barrels a day between March 1 and April 25 — far exceeding the previous peak for a quarterly drawdown in data compiled by the International Energy Agency. Goldman Sachs estimates global observable inventories dropped by 7.1mn barrels a day in April alone. Crude accounts for almost 60% of the decline; refined fuels make up the rest.

The total visible oil inventories — which peaked at nearly 9bn barrels during the Covid-19 demand collapse of March 2020 — stood at approximately 8.5bn barrels when the Iran war began in late February. They are now falling at a near-vertical rate. JPMorgan's head of global commodities research Natasha Kaneva warns that OECD inventories could reach 'operational stress levels' by early June and 'operational minimum' floors by September, if the strait doesn't reopen. In simple terms that means in effect the world runs out of useable oil reserves and rationing starts.

Tales of two thresholds

There are identifies two critical levels that the market has not previously been forced to confront simultaneously. The operational stress level — at approximately 7.6bn barrels — is the point at which the system begins to experience significant functional strain: price volatility becomes extreme, rationing of refined products begins in the most exposed markets, and the margin for error in supply chain management drops to near zero. JPMorgan estimates this will be reached by June.

The operational floor — at approximately 6.8bn barrels — is categorically different. As Kaneva explained, 'inventories are acting as the shock absorber of the global oil system. But not every barrel can be drawn.'

The operational minimum is reached long before inventories actually hit zero. Below the floor, pipelines cannot maintain pressure, refineries cannot function, and the physical infrastructure of the oil system begins to fail regardless of price signals. JPMorgan's model, which assumes demand destruction of 5.6mn barrels per day between June and September, projects this floor will be reached by September.

It’s the same story with gas: if Europe’s gas storage tanks are 10% full or less, it become technically difficult to get the remaining gas out of the tanks as the pressure becomes too low. There is technical lower limit that reserves cannot fall below before causing physical problems to tapping whatever remains in storage.

The distinction matters because markets price scarcity but cannot price physical absence. Once the operational floor is breached, the mechanism of price signals stops working — there is no price at which unavailable product can be purchased. The last time the market faced these problems was during the 1973 oil embargo.

Where the stress is concentrated

The most immediate stress points are in fuel-import-reliant countries in Asia — Indonesia, Vietnam, Pakistan and the Philippines — where traders warn inventories could hit critical levels within weeks. If Hormuz doesn't reopen by early June, some Asian countries will face a macroeconomic shock from the shortage of gasoil, while Europe may have one more month before the situation becomes difficult to manage.

India has already begun facing shortages in liquefied petroleum gas (LPG) supplies, while higher fuel costs are adding to the looming inflation shock and the cost-of-living crisis. US crude stockpiles, including the Strategic Petroleum Reserve, have declined for four consecutive weeks, while distillate inventories recently fell to their lowest levels since 2005.

China and South Korea remain relatively comfortable, with stockpile levels so robust that both are considering resuming refined-product exports that were earlier curbed. Singapore's fuel-storage hub stocks were recently above seasonal averages. The divide between the haves and have-nots of crude storage is becoming the defining economic fracture of the conflict.

Price outlook

Goldman Sachs (NYSE: GS), while trimming near-term forecasts, maintains upside risks, warning that extended Hormuz disruptions could push Brent to $120 per barrel in the third quarter, potentially averaging $115 per barrel in the fourth quarter under severe scenarios. Analysts say that if the strait remains partially blocked into June, oil prices may need to rise further to suppress global demand and rebalance the market — effectively using price as a rationing mechanism before physical rationing becomes necessary.

The IEA coordinated the release of 400mn barrels of emergency reserves, but the US has so far released only about 79.7mn barrels of the 172mn barrels it pledged. Even full deployment of strategic reserves buys weeks, not months, at current drawdown rates. The strategic reserves countries have built up were designed to deal with short-term shocks, not to replace missing production.

Analysts warned that even if Hormuz shipping resumes soon, supply chains may require months to stabilise — because restarting Middle Eastern production facilities becomes increasingly difficult the longer shut-ins continue.