Oil prices could stay elevated even after the Strait of Hormuz is opened as countries rebuild inventories amid limited supply increases.

This is according to Ninety One’s head of natural resources Paul Gooden, who told a recent media briefing in Hong Kong that he expects demand to come from nations seeking an energy security buffer after the Iran war.

“Post this event we are going to want to refill all the SPRs (Strategic Petroleum Reserves), and probably countries that don’t have SPRs, are going to want them,” he said.

“Some countries have been caught with specific product shortages; Australian diesel is the obvious example.”

Assuming the Strait of Hormuz opens in the coming weeks, Gooden noted that oil inventories will have lost roughly 1.5 billion barrels out of 8 billion barrels of global crude oil.

He points out in order for those inventories to be rebuilt, it would require half a billion barrels per year, assuming the same inventory target is refilled over three years.

“That’s roughly one and a half million barrels a day of extra oil demand for three years,” he said.

“Normally the oil market grows about 1% a year by about a million barrels per day of growth, and so what that means is that underlying growth rate is going to more than double.”

“To meet that extra demand growth is going difficult because capital discipline in the industry is very strong,” he added.

“Investors have been telling the oil and gas companies for the last decade: don’t grow, low or no growth, and actually the only asset class that can respond on a one to two year view is US shale.”

Oil prices could rise significantly

Gooden also warned that if the Strait of Hormuz remains closed into the summer, oil prices could rise significantly.

“Every month that this goes on, it’s probably net 10 million barrels a day of inventory gets drawn, so that’s 300 million barrels a month,” he said.

What is more problematic is that this drawdown in inventories is occurring just before an expected peak northern hemisphere demand for oil as well as the air conditioning season in the Middle East, according to Gooden.

Of the 8 billion barrels of global inventories, he said: “most of it, probably about 6 billion barrels, is not actually excess inventory, it is actually pipe flow, it’s oil in pressurised pipelines or tankers or refinery systems”.

Therefore, he warned that investors need to beware of being lulled into a “false sense of security” by seemingly high global oil inventories because he believes actual tank bottoms are probably much lower.

Gooden suggested the reason why oil prices aren’t already higher is due to the highly financialised nature of brent crude oil contracts, where he notes that financial flows account for 90 times the physical flow of oil. 

He said: “That futures curve is very financialized, it’s very vulnerable to tweeting, press releases and things like that. I think if you spoke to most market observers and you said you had an outage of this size, you would have thought the oil price would be a little bit higher.”

Medium term oil prices to remain elevated

Although Gooden was relatively cautious on the price of oil entering the year, he said he was adding energy exposure because overhangs on the price of oil were being removed even before the outbreak of the Iran war.

He said: “The news out of Texas is the geology is getting a little bit tougher, so the bottom line is, US shale is no longer going to be a massive deflationary force in the oil market, which it has been for the last decade.”

Another overhang is OPEC spare capacity, which Gooden questions. “Yes, maybe Saudi can surge production for a few weeks but is this really spare capacity we can count on?” he said.

“I think the mid-cycle oil price goes up. Before this, I was thinking $70 Brent is the mid-cycle price. I now think $80.”

Another key reason he has this view is due to the renewed awareness around the vulnerability of oil supplies in the Strait of Hormuz and the geopolitical risk premium it could warrant.

“20% of the world’s oil, all the spare capacity in the system, is vulnerable to Hormuz,” he said. “It’s difficult to put a number on that geopolitical risk, but it’s something.”