Drawing down crude inventories at a record pace, with SPR releases doing the heavy lifting to cushion the Gulf supply shock, only delays the move higher in crude oil prices. Once those buffers are depleted, oil risks being violently repriced higher.
That is why the Trump administration's race to secure a peace deal with Iran and reopen the Hormuz chokepoint has taken on new urgency in recent weeks. The longer the critical waterway remains disrupted, the greater the risk that the oil shock will escalate from a market event to a financial crisis, with higher crude prices feeding directly into inflation, consumer stress, and broader recession risk.
The message from the SPR crude data this week, the largest ever draw, is very clear: The Trump administration is buying time to get a deal done with Tehran. If Hormuz does not reopen soon, the market will eventually force demand destruction through much higher prices.
UBS analyst Arend Kapteyn penned a note Friday morning titled "When The Oil Buffers Run Out."
Kapteyn warned, "Oil prices can move much higher once inventories are depleted."
He continued:
This week saw the largest-ever drawdown in US oil inventories since records began in 1982: commercial inventories and the SPR combined fell by 17.8mb. These stock draws help explain why—despite nearly three months of supply shortfalls from the Middle East—oil is still trading "only" around $105/bbl.
Oil prices and volumes are linked by the price elasticity of demand. A simple relationship allows us to approximate price outcomes under different supply disruptions and degrees of demand destruction:
The oil team estimates that the net supply loss via the Strait of Hormuz is around 9mb/d after SPR releases, equivalent to a ~9% disruption.
At $105/bbl, this implies demand elasticity of roughly –0.2: a 1% increase in prices reduces demand by 0.2% (see chart). Without SPR releases, the supply shock would be closer to 12%, implying a price nearer $123/bbl.
There are two ways in which oil prices could increase much more:
- First, if inventories are depleted they can no longer buffer the supply shortfall.
- Second, as the "easy" adjustments in consumption and production are exhausted, demand becomes less responsive to higher prices.
The chart highlights some scary combinations.
For instance, if the global supply shortfall were 14% then even with the current demand elasticity, oil should be trading closer to $140/bbl. If the demand elasticity was 0.15 rather than 0.2, the implied oil price would be $208/bbl, and if the demand elasticity was 0.1 prices would approach $372/bbl.
Earlier this week, SPR data showed drawdowns continue to accelerate, with 9.92 million barrels - a record - drained last week. That means over 10% of the SPR has been depleted in just a few short weeks.
Total U.S. crude stocks, including the SPR, are at their lowest level since June 2025, with this week seeing the largest combined SPR and commercial stock drawdown in history.
Cushing stocks are rapidly approaching "tank bottoms" once again.
Reminder to readers: Global visible stock draws accelerated over the last week, bringing average May month-to-date visible stock draws to a record 8.7mb/d.
Earlier, Rapidan Energy Group analysts warned that a prolonged closure of the Hormuz chokepoint risks pushing the economy into a downturn on a scale approaching that of the 2008 Great Recession.
The clock is ticking for the US to secure a deal with Tehran to reopen the critical waterway and avert a further energy shock that would complicate the Trump team's midterm election odds.
Professional subscribers can read further commentary on the Gulf energy crisis-related mayhem at our new Marketdesk.ai portal.