Drawing down crude inventories at a record pace, with SPR releases doing the heavy lifting to cushion the Gulf supply shock, only delays the move higher in crude oil prices. Once those buffers are depleted, oil risks being violently repriced higher.
That is why the Trump administration's race to secure a peace deal with Iran and reopen the Hormuz chokepoint has taken on new urgency in recent weeks. The longer the critical waterway remains disrupted, the greater the risk that the oil shock will escalate from a market event to a financial crisis, with higher crude prices feeding directly into inflation, consumer stress, and broader recession risk.
The message from theSPR crude data this week, the largest ever draw, is very clear: The Trump administration is buying time to get a deal done with Tehran. If Hormuz does not reopen soon, the market will eventually force demand destruction through much higher prices.
UBS analyst Arend Kapteyn penned a note Friday morning titled"When The Oil Buffers Run Out."
Kapteyn warned,"Oil prices can move much higher once inventories are depleted."
This week saw thelargest-ever drawdown in US oil inventories since records began in 1982: commercial inventories and the SPR combined fell by 17.8mb. These stock draws help explain why—despite nearly three months of supply shortfalls from the Middle East—oil is still trading "only" around $105/bbl.
Oil prices and volumes are linked by the price elasticity of demand.A simple relationship allows us to approximate price outcomes under different supply disruptions and degrees of demand destruction:
The oil team estimates that thenet supply loss via the Strait of Hormuz is around 9mb/d after SPR releases, equivalent to a ~9% disruption.
At $105/bbl, this implies demand elasticity of roughly –0.2: a 1% increase in prices reduces demand by 0.2% (see chart).Without SPR releases, the supply shock would be closer to 12%, implying a price nearer $123/bbl.
There aretwo ways in which oil prices could increase much more:
Source: ZeroHedge News
