One billion barrels of oil are lost with late opening of Hormuz

The good news: the Strait of Hormuz is open again, after Iran and the United States signed a memorandum of understanding this week.

The bad news: It may be too late.

Oil has not left the Middle East for almost four months. In total, the world lost 1.15 billion barrels of oil supply during the war, according to analytics firm Kpler.

This has left the oil market in a precarious state, rapidly approaching a breaking point. The International Energy Administration's strategic petroleum reserves are at their lowest levels since 1990. America's emergency reserve is at a 43-year low. And commercial inventories have reached operational stress levels.

"Want to see chaos?" President Donald Trump said at the G7 in Versailles on Wednesday. "Our reserves run out in about four weeks."

Trump is right. But this week's reopening of the strait may not be enough to get oil out of the Persian Gulf fast enough to prevent crude oil inventories from effectively going to zero.

Oil prices may have to rise again.

The tipping point
The oil market certainly believes Trump's timing is impeccable. Prices have dropped, as he predicted, like a stone in recent days as the memorandum of understanding with Iran took shape and came into force.

Brent oil prices began to fall after the ceasefire announcement in mid-April, retreating from a wartime peak of $126.41 to below $80 per barrel today.

Behind the oil crash was the historic oversaturation of crude oil leading up to the war, which effectively cushioned the world from the biggest supply shock on record. But this excess supply evaporated and quickly turned into a worrying deficit.

World oil stocks have fallen - dramatically - by 190 million barrels over the past few months. A critical oil hub in Cushing, Oklahoma, that distributes fuel throughout the United States, has just reached its operational stress level - the equivalent of when coffee drops below the tap and you have to tilt the container to get the last remnants of grounds into the cup.

Much of what accumulates at the bottom of an oil tank is unusable waste, which makes it difficult to maintain pressure in the pipelines to get the oil to customers.

This isn't just happening in Cushing - storage facilities around the world are approaching a tipping point.

"There would be a time when you wouldn't be able to get it (the oil)," Trump said on Wednesday, warning of an imminent "economic catastrophe" if the strait had not been reopened. He claimed this would have led to comparisons with Herbert Hoover, the former president who oversaw the start of the Great Depression.

Higher prices
The reopening of the strait will not immediately solve the world's stockpile problem. It will only begin the process of normalizing the flow of oil.

The strait will need to be cleared, empty tankers will need to start returning to the area, production will need to restart, and the oil will need to begin the slow journey to its destination. None of this will happen quickly - it's a process that the oil industry believes could take months before oil flow returns to anything approaching "normal."

Until the oil market actually returns to something close to normal, the system will continue to depend on these stocks.

This is why many industry analysts believe that oil prices have fallen further than necessary, and that the market is underestimating the risk of effectively running out of oil before tanks can be refilled.

"The market has jumped 7 steps ahead of where we are now," said Helima Croft, head of global commodities strategy at RBC Capital Markets. "Everyone's like, 'This is over!' But there's a big logistical challenge to get back to where we were."

Once the euphoria over the reopening of the strait cools, market fundamentals should eventually take over, pushing oil prices up again.

"Regardless of what happens in the coming weeks in the Strait of Hormuz, American consumers will see higher prices in the summer months," said Kpler's Matt Smith. "This has not yet materialized in this way because of the optimism surrounding a deal.

But market forces need to come into play here."

The math confirms: even if the global oil market started producing almost 5 million barrels more than customer demand - as the International Energy Agency predicts - it would take about a year to recover 1.15 billion barrels of lost supply.

"At some point, physical barrels really matter," said Dan Pickering. "If you lose those barrels, it matters."

Lower prices
But the market isn't always logical.

Traders see a flood of oil about to return to the market - especially from cash-strapped OPEC members eager to increase production. This new reality will make it very difficult to change the oil market's momentum, argued Jay Hatfield, CEO of asset manager Infrastructure Capital Advisors.

And perspective matters: the world was so awash in oil before the war began that we are still somewhat insulated from the epic depletion of supplies.

Analysis: Oil price favors Brazilian exports and strengthens the real | CNN PRIME TIME

"We had a lot of cushion, and we ate up that cushion," said Vikas Dwivedi, global oil and gas strategist at Macquarie Group. "We're below where we were before last year - but not by much."

For example, US diesel inventories are at their lowest level since 2003, but are down just 12.4% from the 5-year average. US gasoline inventories are down just 5% from their level a year ago.

Inventory risk is real, but oil optimists are giving too much weight to the problem, argues Dwivedi.

"If you are an oil trader in a refinery, and your job is to get oil, you needed to make 10 calls to get it during the crisis. Now you need to make 5 or 6 calls," said Dwivedi. "In the next few weeks, salespeople come to you saying, 'Hey, I have oil, want to buy it?'

Oil, coffee and aircraft: see the most exported items from Brazil to the USA

Source: CNN