"Despite increased production by oil-producing countries, inventories are depleted"—Amid transport instability in the Strait of Hormuz and the Red Sea, the global energy supply chain is 'fragile', with rising inflationary pressures in the West.

Global crude oil and petroleum product inventories are declining, prolonging the energy supply chain crisis
Despite increased production by oil-producing countries, transport insecurity in the Strait of Hormuz and the Red Sea persists, constraining supply recovery
US inflationary pressures intensify; EU considers 'windfall tax' on oil and gas companies

The global energy supply chain crisis is prolonging. Worldwide crude oil and petroleum product inventories are rapidly declining, weakening the market's capacity to absorb additional supply shocks. Middle Eastern oil-producing countries are accelerating production expansion, but transport insecurity around the Strait of Hormuz and the Red Sea continues, limiting actual export recovery. The consequent rise in energy prices is spreading through production and transportation costs, intensifying inflationary pressures in major Western countries such as the US and Europe.

Warning from Saudi Aramco CEO

According to a report on the 12th (local time) by Dow Jones Newswire, Amin Nasser, President and CEO of Saudi Arabia's state-owned oil company Aramco, said at the 25th World Petroleum Congress held in Riyadh, "Trade disruptions through the Strait of Hormuz and attacks on regional energy infrastructure have put all links of the energy supply chain to the test." He added, "This is an unprecedented attack on the lifeline of the global economy, Saudi Arabia, and Aramco." He also pointed out, "Crude oil supply pressures worldwide are severe," and "the sharp rise in refined product prices is further exacerbating these difficulties."

Additionally, CEO Nasser diagnosed that with crude oil inventories rapidly decreasing, the market's ability to respond to supply shocks is practically nearing its limit. He said, "Commercial onshore oil inventories currently fall far below 6 billion barrels, which is the last remaining supply buffer." He added, "More worrying is that the vast majority of this volume is practically difficult to use." He further stated, "The buffering capacity provided by inventories has weakened so much that it is hardly a buffer anymore," and emphasized, "Relying on inventories can never be a permanent solution for energy security." It is also expected to take considerable time to restore depleted inventories. Nasser CEO forecasted, "Until the Strait of Hormuz is fully reopened and market confidence is restored, the pressure on the entire energy supply chain will increase," adding, "It could take up to two years to meet demand while rebuilding inventories."

Petroleum product inventories also 'in emergency'

Earlier, similar warnings were raised at the Energy Intelligence Forum held in London on the 5th. At that time, CEO Nasser stated, "The world entered this crisis with about 1 billion barrels of oil inventory, but since then, approximately 300 million barrels of crude oil supply have been disrupted." He continued, "To mitigate these supply setbacks, more than 100 million barrels have been released from inventories, most of which were drawn from commercial onshore stocks," and added, "The global energy supply system is already under considerable stress, with extremely limited capacity to absorb additional shocks."

Concerns regarding inventories are also emerging in the petroleum product market. Russell Hardy, CEO of Vitol, the world's largest independent energy and commodity trading company based in Switzerland, said at the Asia Pacific Petroleum Conference held last month in Singapore, "The petroleum product market is very tight and rigid," adding, "Global petroleum product inventories are still declining and are nearly at bottom levels." He emphasized, "Refining capacity sufficient to prevent further inventory decline is not yet operational," and "Surplus quantities worldwide continue to be depleted." Exports of petroleum products from the Middle East and Russia have each decreased by 2 million barrels per day, indicating that the petroleum product market crisis is more severe than that of crude oil.

Oil-producing countries' production increase movements become visible

Meanwhile, major oil-producing countries in the Middle East are stepping up efforts to expand crude oil production. Looking at the latest report from the Organization of the Petroleum Exporting Countries (OPEC), Iraq’s average daily crude oil production last month increased by 386,000 barrels to 3.92 million barrels per day compared to the previous month. The United Arab Emirates' (UAE) production rose by 86,000 barrels per day to 3.917 million barrels, and Kazakhstan’s production increased by 22,000 barrels per day to 1.851 million barrels.

Saudi Arabia’s crude oil production last month was also an average of 8.001 million barrels per day, expanding by 744,000 barrels compared to the previous month. This accounts for about 78% of the total OPEC+ production increase of 956,000 barrels per day in the same period. However, compared to Saudi Arabia’s last month’s production target of 10.478 million barrels per day, this is only about 76.4%, leaving a shortfall of 2.477 million barrels per day. Accumulated setbacks such as prolonged maritime transport disruptions and damage to the East-West transversal pipeline have slowed the pace of supply capacity recovery.

Table 1. Average daily crude oil production of major oil-producing countries in September

Houthi offensive intensifies Saudi burden

Recently, attacks by Houthi rebels have also become a key burden on Saudi crude oil supply chains. After declaring a maritime blockade against Saudi Arabia in July, the Houthis claimed to have attacked two Saudi oil tankers navigating the Red Sea. At that time, the Houthis controlled areas near the Bab el-Mandeb Strait in the southern Red Sea. Later that month, they claimed to have struck Aramco oil facilities located on the Red Sea coasts of Yanbu and Jizan using missiles and drones, and also attacked oil supply and transportation facilities connecting the Eastern oil fields and Yanbu in Saudi Arabia.

This month, the range of attacks expanded to major infrastructure facilities on Saudi mainland. According to foreign media reports, the Houthis attacked Riyadh King Khalid International Airport and Abha International Airport in the southwest on the 6th and 7th, resulting in a total of 3 deaths and 36 injuries. On the 8th, King Khalid International Airport was struck again by a cruise missile, killing 3 Saudis and damaging one aircraft of the state-owned airline Saudia. On the 10th, an airstrike targeting the same airport caused 12 deaths and 309 injuries. On the 11th, a projectile fell on the airport passenger terminal, resulting in 1 death and 11 injuries. On the 13th, Aramco headquarters in Dhahran, eastern Saudi Arabia, was attacked by the Houthis, causing a fire.

Major Western countries 'groan' over surging oil prices

As the energy shock originating from the Middle East prolongs and oil prices continue rising, inflationary pressures in major countries are also increasing. For example, on the 15th, the US Department of Labor's Bureau of Labor Statistics (BLS) announced that the Producer Price Index (PPI) rose by 1.3% month-over-month last month. This exceeded market expectations by 0.7 percentage points and marked the largest increase in 4 years and 6 months since March 2022. The year-over-year PPI growth was 6.3%, also significantly surpassing the market expectation of 5.5%. The primary cause of the surge in producer prices was energy prices. Last month, US final demand goods prices rose 2.6% month-over-month, the largest increase since the statistics started in December 2009. Over 80% of this increase originated from the energy sector, particularly gasoline prices, which soared by 20.3% in just one month.

The US Federal Reserve (Fed) is monitoring these inflationary pressures closely. The recently released October Beige Book noted, "Rising oil prices have permeated all regions," further stating, "Companies have reported elevated diesel prices, and fuel surcharges are passing through costs across the entire supply chain." The Beige Book is a report compiled after the 12 regional Federal Reserve Banks contacted banks, businesses, and experts in their jurisdictions to gather recent economic trends. The Fed explained, "Several regional businesses cited ongoing uncertainties surrounding energy and tariffs," and "as existing contracts expire and input costs and customer delivery agreements are renegotiated, prices are expected to rise further over the next few months."

In the European Union (EU), in response to soaring oil prices, there is even consideration of imposing a so-called 'windfall tax' on oil and gas companies that have earned huge profits. According to a Reuters report on the 12th, EU Climate and Taxation Commissioner Wopke Hoekstra announced that the Executive Commission will form a working group to examine the pros and cons of a regional joint windfall tax on oil and gas companies. In an interview with Reuters, he stated, "Citizens, particularly vulnerable groups, are facing sharp increases in energy bills," and "some companies are earning excessive profits derived from global turmoil without providing additional services or products." He added, "Many citizens and politicians feel this is unfair," expressing consensus on the rationale for introducing a windfall tax.