Good morning. We’re now entering the fourth month since the start of the Iran war, and the Strait of Hormuz has been blocked for nearly as long. The biggest question on everyone’s mind is where oil prices are headed. Many observers have been surprised that Brent crude hasn’t risen more; it averaged around $104 per barrel in May. 

But a look at prices in the context of commercial inventories shows there is a clear pattern. The two variables have a very high inverse correlation, and May’s average Brent crude oil price fit the historical trend.  

However, as Hamad Hussain at Capital Economics pointed out to Unhedged, if the supply shock continued and commercial inventories continued to fall at about 100mn barrels per month — as they did in April and May — oil prices could average between $130 and $140 per barrel in June, and possibly even higher.

China’s dramatic reduction in crude oil imports has cushioned some of the supply shock, as has the release of strategic oil reserves by the US and other countries. But these aren’t sustainable responses; the US’s oil stocks have already fallen to a 22-year low. The oil supply crunch will be hard to cushion for much longer. Let us know your thoughts: [email protected].

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