Inventories Acting as Shock Absorber of Global Oil System

Inventories are acting as the shock absorber of the global oil system, J.P. Morgan analysts, including Natasha Kaneva, J.P. Morgan’s head of global commodities strategy, said in a report sent to Rigzone by Kaneva on Thursday.

“In this war driven oil shock, inventories have become the market’s primary balancing mechanism,” the analysts said in the report.

“Unlike a typical disruption where spare production capacity can be mobilized quickly, the location of the shock and the scale of current supply losses mean the immediate adjustment has to come from barrels already in storage,” they added.

The analysts noted in the report that the crisis began with stocks in relatively strong shape.

“Global inventories surged in 2020 and 2021 during the Covid demand collapse, then drew sharply through 2022 and 2023 as economies reopened, Russia invaded Ukraine, and markets tightened,” they highlighted.

“That tightening phase reversed in 2024 and 2025, when supply once again outpaced demand, allowing stocks to rebuild. As a result, the world began 2026 with a healthy 8.4 billion barrels in storage,” they added.

Of that 8.4 billion barrels, roughly 6.6 billion are held onshore, with another 1.8 billion afloat, the analysts highlighted in the report.

“Some of the floating barrels are simply in transit from producers to consumers, others - such as sanctioned Russian and Iranian crude - effectively function as floating storage,” they pointed out.

“By type, about 5.2 billion barrels are crude, while 3.2 billion are refined products,” they added.

The analysts also revealed that visibility varies widely.

“OECD inventories are among the most transparent because member countries maintain strategic reserves, collect standardized data, and publish timely statistics - giving OECD stocks an outsized role in price formation,” they said.

“Much of the rest of the world is far less observable, particularly across the developing world. China is the notable exception, where we estimate inventories began the year near 1.3 billion barrels,” they added.

The J.P. Morgan analysts also noted in the report that “it is important to distinguish between Strategic Petroleum Reserves - state-controlled emergency barrels - and commercial inventories, which are privately held stocks used in the normal course of trade and refining”.

They went on to warn in the report that not every barrel can be drawn.

“Out of the 8.4 billion barrels in global inventories, we estimate only 0.8 billion barrels are realistically available without pushing the system into operational stress,” they said.

“As of April 23, roughly 280 million barrels have already been consumed to cushion the impact of the conflict,” they added.

“On paper, that still suggests comfortable buffers. In practice, the picture is more complicated,” they revealed.

“Floating storage can be tapped quickly, but only a slice of onshore inventories - around 580 million barrels - is readily accessible. The rest is effectively locked up in pipeline fills, minimum tank levels, and other operational constraints,” they warned.

The J.P. Morgan analysts stated in the report that a market can still hold hundreds of millions of barrels and yet become fragile once working stocks fall too low.

“Like blood pressure in the human body, the issue is circulation,” they said.

“Pipelines lose pressure flexibility, terminals cannot load efficiently, refiners struggle to secure the right grades on time, and traders bid aggressively for nearby supply,” they highlighted.

“The system does not fail because oil disappears, it fails because the circulation network no longer has enough working volume,” they warned.

The J.P. Morgan analysts went on to state in the report that, in a prolonged disruption scenario, demand is rationed well before inventories approach critically low levels. 

“In theory, stocks could last much longer - but only at the cost of reduced consumption, lower refinery runs, and a broader economic slowdown,” they said.

“As a result, a full drawdown of global inventories is neither feasible nor likely,” they added.

The analysts noted that, “like an onion, inventory draws happen in layers”. 

“The sequence is determined by speed of access, economic cost, political willingness, and logistical ease, not by who has the most barrels,” they said.

“Easy barrels are peeled first, strategic barrels later, critical barrels rarely. The deeper the draw, the higher the price and the economic cost of each additional barrel withdrawn,” they pointed out.

The analysts outlined in the report that the first layer of this onion is oil on water and floating commercial stocks. The second layer is commercial onshore stocks and the third layer is strategic petroleum reserves, according to the analysts, who highlighted in the report that a pivot comes as demand destruction replaces inventory draws.

“Well before the system is emptied, high prices begin to ration demand,” the analysts said.

“Consumers drive less, industry cuts runs, airlines trim schedules, and refiners reduce throughput,” they added.

The went on to warn in the report that, “given the magnitude of the demand pullback, our balance now suggests OECD commercial inventories are on track to approach operational stress levels by early June”.

The J.P. Morgan report went on to outline that operational minimum stocks are typically the last barrels drawn, and added that, in practice, these are deliberately avoided.

“Pipeline fill, tank bottoms, linepack equivalents, minimum terminal inventories, and the product stocks required for day-to-day continuity are rarely accessed, because drawing them materially increases the risk of operational disruption and broader system instability,” they warned.

“On our estimates, OECD commercial stocks could fall to these operational floors by September if the Strait of Hormuz remains closed, assuming demand destruction stabilizes at 5.5 million barrels per day,” they added.

In a release posted on its website on March 11, the International Energy Agency (IEA) announced that its member countries would carry out their “largest ever oil stock release amid market disruptions from Middle East conflict”.

“The 32 member countries of the International Energy Agency unanimously agreed today to make 400 million barrels of oil from their emergency reserves available to the market to address disruptions in oil markets stemming from the war in the Middle East,” the release stated.

In its latest oil market report at the time of writing, which was released in April, the IEA projected that global oil demand would contract by 80,000 barrels per day this year, as the Iran war “upend[ed]” its global outlook.

“This is 730,000 barrels per day less than in last month’s report and a forecast 1.5 million barrel per day 2Q26 decline would be the sharpest since Covid-19 slashed fuel consumption,” that report stated.

“Initially, the deepest cuts in oil use have come in the Middle East and Asia Pacific, mainly for naphtha, LPG and jet fuel. However, demand destruction will spread as scarcity and higher prices persist,” it added.

To contact the author, email andreas.exarheas@rigzone.com