The next oil shock could hit much even harder

Oil reserves have plummeted to historic lows, leaving global crude markets dangerously exposed to any new crisis

The global oil markets have weathered the supply shock caused by the U.S.-Iran conflict better than many expected. Despite severe disruptions to some of the world’s most important oil routes, the market has avoided the severe supply shortages many feared.

So far, the world has managed through a combination of emergency stock releases, inventory drawdowns and falling demand, but that cushion is now getting thinner with each passing day.

Emergency oil stocks are meant for precisely this sort of crisis. IEA member countries that are net oil importers are required to maintain stocks equivalent to at least 90 days’ net imports. In the early days of the U.S. and Israeli war on Iran, roughly 400 million barrels were made available from OECD emergency reserves.

The impact is already visible in U.S. reserves. The U.S. Strategic Petroleum Reserve has dropped to 311.4 million barrels—its lowest level since March 1983.

“The large strategic stock releases earlier in the conflict have meaningfully depleted the buffer available for any future disruption,” Vortexa market analyst Mick Strautmann told The Wall Street Journal earlier in July.

The head of the International Energy Agency, Fatih Birol, is of the view that there is still plenty of oil in OECD storage for further releases if necessary.

“IEA countries still hold a substantial volume of emergency stocks in reserve, including over one billion barrels of government-controlled stocks,” Birol said in a statement on oil markets last week.

That may be so. But the fact remains that the buffer available to global crude markets is considerably smaller than it was when the crisis began.

And this is happening at a time when markets remain on edge.

The Strait of Hormuz, which normally handles about 20 million barrels of oil and petroleum products a day—roughly one-quarter of the world’s seaborne oil trade—has now slowed to a trickle. War clouds are also hovering over the Red Sea chokepoint of Bab el-Mandeb, which has been handling between four million and five million barrels daily of Saudi oil in recent weeks.

In the absence of free passage through the Strait of Hormuz, the Bab el-Mandeb route has become even more crucial to Saudi exports. Any disruption there would add another spanner to crude supplies to the markets.

Added to all this is the disruption to Kazakh oil exports through the Caspian Pipeline Consortium (CPC). Kazakhstan’s production fell by more than half after drone attacks forced the temporary closure of its main export terminal on Russia’s Black Sea coast.

The CPC system carries more than 80 per cent of Kazakhstan’s oil exports. Loading operations have since resumed after a week-long halt, but the disruption underlines the vulnerability of yet another important supply route.

Veteran energy journalist Irina Slav, writing for Oilprice.com, points out that Ukrainian forces continue to target Russian refineries as well, leading to a temporary ban on diesel exports.

Yet despite these pressures, the markets have avoided even greater shortages. Interestingly, China provides a large part of the answer as to why.

China entered the crisis with considerable crude inventories. Exact figures are difficult to establish, as it does not publish comprehensive inventory data. The U.S. Energy Information Administration, however, estimated its government-held and commercial crude stocks at nearly 1.4 billion barrels at the end of 2025.

China had also been adding to those inventories at an estimated rate of 1.1 million barrels per day during 2025.

As per media reports, Chinese crude imports fell from around 12 million barrels per day before the crisis to around seven million barrels per day in June.

The sharp decline was not simply the result of China drawing on its inventories. Lower refinery runs and weaker domestic fuel demand also reduced the need for imported crude. And while commercial inventories were drawn down, analysts say China’s underground strategic reserves remained largely untouched.

But by sharply reducing its purchases from the international markets, China helped ease competition for available crude at a time when supplies through Hormuz were severely restricted. Had China continued buying at its pre-war levels, pressure on the available crude would have been considerably greater.

Global demand for crude oil also fell by close to five per cent in the second quarter of the year, according to IEA data, a natural result of the oil price spike caused by the war in the Middle East. In Europe, which is short on diesel stocks, consumption fell by 5.7 per cent in May. In China, diesel consumption fell by 10 per cent, while gasoline demand fell by a more modest five per cent.

All this means emergency stock releases and commercial inventories have helped make up for lost supplies, while higher prices have forced demand lower. But emergency reserves cannot be drawn down forever, commercial inventories have their limits, and demand destruction is hardly a healthy way to balance an oil market.

How long this balancing act can continue is anybody’s guess.

The real issue, then, is what happens if another major disruption hits before inventories can be rebuilt. With the crude cushion already considerably thinner, the markets may not be in the same position to weather the next storm.

Toronto-based Rashid Husain Syed is a highly regarded analyst specializing in energy and politics, particularly in the Middle East. In addition to his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.