IMF Issues Sudden Warning: The Next Oil Price Surge Could Be Even More Intense Than Expected!

The International Monetary Fund (IMF) has warned that the multiple “buffers” previously used to cope with supply disruptions in the global oil market are being rapidly depleted. If there is another significant volatility in the Middle East, international oil prices may be more susceptible to shocks than before, further exacerbating global inflationary pressures.

In a recent analytical article, the IMF stated that in recent months, the global oil market has been able to withstand large-scale supply disruptions mainly due to three factors: releases from commercial and strategic reserves, increased supply from other oil-producing countries, and high oil prices suppressing part of the demand.

However, as inventories continue to decline, idle production capacity is gradually being brought online, and consumers and businesses are compressing energy demand, the market’s ability to cope with the next shock has become significantly narrower.

The IMF pointed out that if countries fail to replenish oil inventories in time, the global market will be in an even more fragile position when facing the next supply interruption.

The three main “buffers” are gradually being depleted

The first is oil inventories.

The IMF estimates that from March to May this year, the global oil market faced an average daily supply gap of about 4 million barrels. To ease supply pressure, some countries tapped both commercial inventories and strategic reserves, allowing the market to maintain a short-term supply-demand balance.

However, the release of inventories can only temporarily relieve pressure and cannot continuously replace normal supply. Once inventories fall to relatively low levels, the market will lack sufficient crude oil for rapid release in the event of new emergencies.

According to data from the U.S. Energy Information Administration (EIA), as of the week ending July 17, the U.S. Strategic Petroleum Reserve had dropped to about 311 million barrels, significantly lower than at the beginning of the year and near multi-decade lows. The U.S. strategic reserves are mainly stored in underground salt caverns along the Gulf of Mexico and are typically used to respond to wars, natural disasters, or other severe supply disruptions.

The second buffer is increased supply from non-Gulf oil-producing countries.

Previously, the United States, Guyana, Venezuela, Russia, and other oil-producing nations expanded production, partially offsetting some supply losses. At the same time, China slowed some crude oil purchases, freeing up more spot market resources for Europe and other importing regions in Asia.

However, the extra output is not unlimited. As some idle capacity has already been put into use, if supply declines again in the future, the scope for other oil-producing nations to quickly ramp up production may become even more limited.

The third buffer comes from declining demand.

When oil prices rise sharply, households reduce driving and non-essential consumption, while companies may trim transportation and energy use. This contraction in demand helps balance the market but also means high oil prices have already started to impact economic activity.

In other words, although falling demand can depress prices, it does not mean the market’s supply issues have been resolved. Rather, it may be the result of consumers and companies being forced to bear higher energy costs.

The Strait of Hormuz remains a key variable

The Strait of Hormuz is one of the world’s most important energy transport corridors. Under normal circumstances, about 20 million barrels of crude oil and refined products pass through this region daily, accounting for roughly one-fifth of global oil consumption.

The IMF noted that during periods of severe disruption, oil flows through the Strait of Hormuz had plummeted to about 1 million barrels per day. While some tankers can reroute and some producing countries possess alternative oil pipelines, current alternatives are still insufficient to fully compensate for the transport losses caused by Strait interruptions.

This is why, when regional tensions rise, international oil prices often react sharply and rapidly.

In late July, as the market once again worried about energy transport disruptions, Brent oil briefly soared above $100 per barrel, reaching recent highs. Subsequently, as tensions temporarily subsided, Brent oil quickly retreated back towards $90 per barrel, indicating that current prices remain strongly driven by news and supply expectations.

The sharp rise and fall of oil prices also shows that the market has not truly stabilized and that investors are constantly adjusting supply risk premiums in response to the latest situation.

High oil prices may reignite global inflation

The impact of rising energy prices is not limited to the gas station.

Oil is an important input cost for transportation, aviation, logistics, plastics, chemical products, and agriculture production. If oil prices remain high for an extended period, companies may pass on higher transportation, packaging, and production costs to consumers, thereby driving up prices of food, airline tickets, courier services, and daily consumer goods.

According to the American Automobile Association (AAA), as of July 27, the average national price of regular gasoline in the U.S. was around $4.11 per gallon, up from about $4 a week earlier. Rising oil prices have already begun to feed through into Americans' daily travel costs.

More importantly, rising energy prices may interrupt the process of global inflation subsiding.

In its July update of the World Economic Outlook, the IMF highlighted that the decline in global inflation has stalled, and shocks to energy supply and financial market repricing remain key downside risks for the global economy.

If oil prices remain high for a prolonged period, central banks in various countries may need to maintain higher interest rates for longer, or even reconsider tightening monetary policy. This would not only increase mortgage and business borrowing costs but could also place pressure on asset prices such as stocks, bonds, and real estate.

The market's short-term easing does not mean risks have disappeared

With the U.S. announcing a pause in certain actions, international oil prices have fallen markedly in the short run. Short-term market concerns over immediate supply interruptions have eased, but the long-term reliability of the Strait of Hormuz and Red Sea shipping lanes remains highly uncertain.

The IMF believes that an important lesson from this shock is that the global oil market cannot rely long-term on drawing down inventories and compressing demand to maintain balance.

For governments, the more urgent task now is to replenish strategic reserves, expand energy supply sources, and improve alternatives outside key transport corridors.

For the market, the focus going forward should be on three key metrics: whether commercial and strategic global oil inventories begin to recover, how much idle capacity remains among major oil-producing nations, and whether oil shipments through the Strait of Hormuz can gradually be restored.

If inventories cannot be replenished in time and supply risks resurface, the next round of oil price increases may be faster than before and more difficult to contain using traditional methods.

The global oil market has been granted a brief respite, but as the IMF warns, the “buffers” that supported the market through previous shocks are becoming increasingly thin.