The World Is Running Out of Oil Buffers Just as Iran Turns Up the Heat

When the United States and Iran went to war in February, oil analysts predicted catastrophe. With the Strait of Hormuz effectively closed, commentators warned of $200-a-barrel crude. The reality was far quieter: Brent, the international benchmark, stayed below $100 for most of the spring. This week, that calm broke. After Iranian strikes on tankers in the strait and apparent Houthi attacks on Saudi oil infrastructure, Brent touched $99, its highest level since late July. The market suddenly looks far more fragile than it did a few months ago.

To understand what changed, it helps to understand why prices failed to spike during the first phase of the war, between March and June. Two factors kept the market stable.

First, the world tapped into unusually deep inventories. According to JPMorgan, global stockpiles stood at roughly 8.4 billion barrels when the crisis began, well above the historic norm. These reserves were drawn down at an unprecedented rate to supplement supply and hold prices down.

Second, China, normally the world's largest oil importer, slashed its imports by about four million barrels a day. Part of this reflected the Chinese economy's ability to adapt to price shocks. Public electric vehicle charging jumped 17 percent between April and May, suggesting drivers were switching to electric as gasoline became expensive. But most of the adjustment came from China drawing down its own stockpiles, built up over the previous two years. Bloomberg analysis suggests roughly half of the drop in Chinese demand came from those reserves.

In short, the world avoided an acute oil shock because everyone, China above all, was spending down their savings of crude. That could not last. By June, many stockpiles were running dangerously low.

President Trump acknowledged this publicly at the G7 summit, claiming oil reserves would run out in about four weeks and warning of what he called "bedlam." He used the argument to justify ending the war through a memorandum of understanding with Iran. The agreement was widely condemned by the American press and political class as a surrender document. Trump has since torn it up and restarted the conflict, presumably emboldened by the muted market reaction last time. Prices rose, but not enough to upend the economy.

That confidence may be misplaced. Neither of the two conditions that kept prices low still holds.

Global inventories are badly depleted. America's Strategic Petroleum Reserve, the world's largest single stockpile and a key stabilizer in recent months, has fallen from about 415 million barrels before the war to 287 million last week, according to the latest Energy Information Administration data. The accessible amount is lower still. The oil sits in vast underground salt caverns already past their shelf life, and at least 160 million barrels are needed at all times to maintain operational pressure, with over 200 million required for safety.

Meanwhile, Chinese imports are recovering. They fell from about 50 million tons before the war to below 30 million in June. Imports from the Persian Gulf rose to roughly 40 million tons in August. Total Chinese crude imports, running at about 12 million barrels a day before the war, have climbed back to 9 million from a low of 7 million in June. If that trend continues, or if imports approach pre-war levels, the market will tighten sharply.

None of this guarantees a price spike. The past few months have shown that forecasting oil prices is a futile exercise, unless one can pay $100,000 a month for early access to Trump's social media posts. Other forces are also pushing prices down. Non-OPEC producers, including the United States, Canada, and Guyana, are set to raise output by a combined 1.4 million barrels per day this year, according to Rystad. Russian exports have recovered from their lows during Ukraine's campaign against Russian oil infrastructure. Iran has also raised the prospect of an accord that would restore traffic through the Strait of Hormuz, which collapsed to zero after this week's tanker attacks.

Finally, prolonged high prices usually end in a crash. The world finds ways to curb oil use, reducing demand, while more expensive producers, such as American shale operators, ramp up output to capture higher prices, increasing supply.

Still, the central point stands: the two main factors that suppressed prices last time are gone. That materially raises the odds of an acute energy crisis in the near future, particularly since Iran knows it must use whatever leverage it holds over the Trump administration before the midterm elections.