The U.S.-Iran conflict is pushing the global oil market towards a critical juncture. American crude and petroleum product inventories have fallen to their lowest levels in over two decades. Simultaneously, U.S. crude exports hit a record in May, rapidly depleting domestic stockpiles. Analysts warn that a sustained closure of the Strait of Hormuz could trigger a sharp spike in oil prices within weeks.
Data released by the U.S. Energy Information Administration (EIA) on Wednesday showed that total U.S. crude and petroleum product inventories fell by 10.6 million barrels in the week ending May 29 to 1.57 billion barrels, the lowest since 2004. Commercial crude stocks, excluding the Strategic Petroleum Reserve, dropped by 8 million barrels to 433.7 million barrels, marking the sixth consecutive weekly decline and far exceeding analysts' expectations of a 3.3 million barrel draw.
The Trump administration has authorized the release of 172 million barrels from the Strategic Petroleum Reserve to curb prices, with approximately 50 million barrels released so far, reducing SPR stocks to 357.1 million barrels. However, as inventories continue to be drawn down, doubts are growing about the sustainability of this buffer mechanism.
Bob McNally, President of Rapidan Energy Group and a former White House advisor, warned that oil prices could surge to $200 per barrel this summer if the Strait of Hormuz does not reopen.
Key Drivers of Inventory Decline
A sharp increase in U.S. crude exports is the primary driver behind the rapid inventory drawdown. According to reports, U.S. crude exports reached a record 5.6 million barrels per day in May, surpassing the previous record of 5.2 million bpd set in April. Buyers in Asia and Europe, seeking alternatives to Middle Eastern supplies, are driving this sustained export strength.
EIA data indicates that in the week to May 29, U.S. crude exports climbed further to 5.9 million bpd, an increase of 140,000 bpd from the previous week, exceeding the production levels of several OPEC members. Concurrently, refinery utilization rates rose to 94.7%, nearing full capacity and maintaining high demand for crude oil.
By destination, Asia led with 2.45 million bpd, followed closely by Europe at 2.4 million bpd, both setting new records. Japan's imports from the U.S. surged 32% month-on-month to 808,000 bpd in May, a record high. European nations including Italy, Bulgaria, Croatia, Turkey, and Greece have also become rare transatlantic buyers.
Price mechanisms are a significant factor in this export boom. In March, the discount of U.S. West Texas Intermediate crude to Brent crude widened to $20.69 per barrel, the largest gap in 13 years, making American crude highly attractive to foreign buyers.
Limits of the "Lender of Last Resort" Role
Analysts characterize the U.S. role in the current global oil market as that of a "lender of last resort" but warn this role has clear limits.
Edward Hayden-Briffett, an analyst at The Officials, part of Onyx Capital Group, stated that the U.S. is acting as a stabilizer for the global oil market, providing a buffer for lost Middle Eastern supply. However, he added, "As that buffer diminishes, it will turn from a guarantee into a source of pressure."
Kpler analyst Matt Smith described the potential market disruption more directly: "The U.S. is the supplier of last resort... Its massive refining capacity and domestic production put it in a more favorable position than almost any other country. But this means U.S. inventories are being drawn down to critically low levels... This means U.S. prices will have to rise to a level that curbs exports and inventory draws. Once U.S. exports slow, the music stops — buyers have few other suppliers to turn to."
Prior to the conflict, the Strait of Hormuz carried about one-fifth of the global supply of approximately 100 million bpd. Its continued closure has created the largest supply disruption in the history of global energy markets.
Export Pullback Expected, But Pressure Remains
Despite May's record exports, analysts expect a pullback starting in June. As expectations for peace talks briefly rose, the WTI discount to Brent narrowed to around $6 per barrel in the latter half of May. Consultancy Energy Aspects forecasts that average U.S. crude exports will fall to about 4.9 million bpd in June and further to around 4.6 million bpd in July. Georgios Sakellariou, a chartering analyst at Signal Maritime, noted that bookings for Very Large Crude Carriers for June are down by at least 10 ships compared to May.
However, an export decline does not mean market pressure will ease. Analysts point out that low domestic U.S. inventories will prompt more crude to flow into local storage tanks, which would somewhat suppress exports. Yet, this also means domestic supply tightness is unlikely to ease quickly.
On the political front, oil price pressure is translating into governance risks for the Trump administration. The U.S. average retail gasoline price last week was $4.44 per gallon, up about 50% from pre-conflict levels. According to a recent poll, American voters' satisfaction with Trump's handling of the economy and inflation has declined noticeably, with mid-term elections approaching in November.
Treasury Secretary Bessant on Wednesday characterized the war-induced inflation rise as "short-term volatility," but market confidence in this assessment is being continually tested as inventory data worsens.
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