US oil majors warned that inventory drawdowns that cushioned supply disruptions from the conflict in the Middle East are reaching their limits, setting the stage for higher crude prices.
Above-normal inventories at the start of the year, along with releases from strategic reserves and waivers on sanctioned oil, helped offset the impact of the effective closure of the strait of Hormuz, which accounts for about a fifth of global daily crude flows.
"The ability for the market to absorb this imbalance is drastically diminished today versus where we started," Chevron chief executive officer Mike Wirth told the Bernstein Strategice Decisions Conference in New York this week.
"Over the next few weeks, we're likely to see those pressures flow through more
directly to physical prices and there's more upward pressure that I would expect as we get into June and certainly into July," he said.
Such a scenario raises the prospect that even if a deal is reached to end the war with Iran and re-open the key oil chokepoint, higher oil prices could linger.
"We're approaching unheard of inventory levels — I mean, really, really low levels," said ExxonMobil senior vice president Neil Chapman at the conference. "You can debate whether that's going to hit those really low levels in two weeks or three weeks. Once you get to that point, then you'll see price shoot up."
Oil prices have traded in a $90-$110/bl range during the period only because of efforts to run down inventories. "It can't last forever," Chapman cautioned. "Once you get to the minimum inventory levels and all-time low inventory levels, there's only one way to go."
While the current energy crisis will likely prove short-term, Wirth said there could be long-term ramifications, though he added it was hard to predict what these could be.
One immediate effect will be an effort to build up reserves to guard against similar crises in the future, which will support oil demand and push up prices. Billions of dollars will also need to be spent repairing damaged energy facilities across the Middle East, which could spur cost pressures in the industry.
"That all tends to suggest the floor under prices is likely to be a little firmer and higher than otherwise would have been," Wirth said.
