The Government was insistent yesterday a move to ‘Level 4’ fuel rationing was very unlikely and it’s still forecasting economic growth and relatively moderate inflation this year.

It may pay for Treasury, the Finance Minister and voters in general to have a look at what the closest observers in the global oil industry were saying as recently as last night, especially now the latest suggestion of peace talks and an opening of the Strait of Hormuz have dissolved.

The world’s largest oil company, Saudi Aramco, said last night global oil reserves were being drawn down at a rate of 14 million barrels per day (mbpd) while the Strait of Hormuz is closed. That tallies with other oil analysts’ estimates of reserve drawdowns of around 100mpbd, which would drag reserves down to stressful levels by June and the effective bottom of the barrel by September.

JP Morgan’s analysts have been leading the market in terms of depth of detail and forecasts on oil prices and reserves. In the last couple of days, they’ve put out a note which points out that one of the reasons the oil price has not sprinted much higher than about US$105 a barrel is that global oil reserves were being drawn down rapidly.

This chart shows the oil reserves estimated by JP Morgan over the last six years or so. And you can see during COVID the reserves went up because we didn’t use so much fuel. Then during 2022 because US President Joe Biden released reserves onto the market to try to limit oil price rises after Russia invaded Ukraine. And then since the beginning of March, we’ve seen global oil reserves and in particular, the US Strategic Petroleum Reserve, drawn down heavily as Trump and others are desperate to try to contain the rise in oil prices.

The International Energy Agency also released a bunch of reserves onto the market. This was with the expectation that this would be a relatively short closure of the Strait of Hormuz. People kept expecting it’s going to open any day now, particularly once the ceasefire kicked in in April. But despite lots of juicy hints from Donald Trump on Friday and Saturday that the Iranians were doing a deal, the Iranians came back with their response to the US memorandum of understanding that Trump deemed ‘unacceptable’.

The Iranians want to keep their nuclear material, to not negotiate any sort of end to their nuclear ambitions, to keep control of the Strait of Hormuz with a tollbooth, and no more Israeli attacks on Hezbollah in Lebanon. They want reparations from the United States for the attacks on Iran and they want the U.S. to get its bases out of the Middle East. This wasn’t the capitulation that Donald Trump has been talking about.

Despite Trump’s blatherings about the strength of the US military, it’s clear that the US Navy are not putting their aircraft carrier groups, into the Strait of Hormuz because it’s too dangerous. The US attempt to escort ships out lasted just a couple of days because Saudi Arabia and other Gulf states told them it risked sparking a resumption of hostilities. The Iranians are more than able to flick a few drones across and take out plenty of tanks and refineries in the United Arab Emirates.

Iran has its foot on the throat of the world economy

It’s very clear now that Iran is in control here. Iran can blockade the straits. America is trying to blockade Iran, but has plenty of reserves of food, and obviously fuel, and is able to hold out for many more months.

Meanwhile, this is a very dangerous situation politically for Donald Trump. The closer he gets to the midterm elections on November 2, the less popular the war becomes.

The JP Morgan chart above shows reserves being drawn down at the fastest rate in recent history. Without the strait being open, the global oil system gets down below the 8 billion barrels. That may seem like a lot of room, but as you’d expect with a complex system of tanks, pipes, tankers, refineries, there’s a lot of oil that’s actually in the system. It’s a bit like a circulatory system filled with blood. Even though you might have however many litres of blood, you die well before all the blood is out because your blood pressure drops and all sorts of systems begin failing. And it’s the same with the oil system.

The system starts failing well before the bottom of the barrel

As you drop below 8 billion barrels, according JP Morgan, things start to fail. And so that puts enormous stress on the markets. And essentially, the prices have to rise to destroy demand to match this significant drop in supply. So, so far with the closure of the Strait of Hormuz, we’ve seen a billion barrels of oil production lost.

And there is only so much oil to be obtained from other places like the United States or Latin America or Africa. And of course, every time you do get it from somewhere different, that is a different length of tanker journey. It’s a different type of oil. And so you get down to what you’d describe as the bottom of the barrel. And when we get there, JP Morgan is saying, we get over US$150 a barrel and a rise towards US$200/barrel. There are some who believe that the true price in which you match demand with supply, the sort of level described as that’ll give us enough demand destruction is well over US$200 per barrel.

The wisdom of the crowds on when the Strait opens

If you look at the collective wisdom of the crowds in predictions markets such as Polymarket, the current balance is that it will open by July 31st is 52%.

But it’s clear that it’s falling the longer this goes on and the clearer it becomes that despite Trump’s talk, the Strait is well and truly closed. The two sides are far apart. Iran isn’t on its knees. America apparently isn’t on its knees, although the closer we get to the midterms the more the pain at the pump intensifies.

That was clear because Trump said overnight he was going to suspend the 14 cents a gallon tax on gas.

It’s worth remembering that our elections are five days after the mid-terms and our electorate is just as sensitive to petrol prices.

Thank you Tadhg Stopford, Alexa Forbes, Tanya Wintringham, Peter J Keegan, Kris Herbert, and many others for tuning into my live video! Join me for my next live video in the app.

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