Global Oil Inventories Accelerate Drawdown; UBS Bullish on Short-Term Oil Prices

Overview

This UBS research report analyzes current fundamentals in the global oil market. The central conclusion is that global oil inventory drawdown is accelerating, with inventory levels already below historical averages and steadily trending toward lows. The report anticipates that as May sees inventory drawdown increasingly concentrated in OECD onshore inventories—where data is more promptly available—the resulting supply-demand gap will become more visible, providing short-term support for oil prices. Additionally, the report discusses Iran’s inventory and production conditions under U.S. sanctions, as well as China’s current crude oil inventory levels.

Core views

Inventory drawdown is accelerating and becoming more visible: The report highlights that global visible inventory drawdown reached 3.1 million b/d in March, slowing to 1.6 million b/d in April, largely because the drawdown shifted to non-OECD onshore inventories, which lag behind in reporting data (accounting for roughly 25% of global inventories). This trend is expected to reverse in May, with drawdown shifting predominantly to OECD onshore inventories—evidenced by recent sharp declines in U.S. inventories—making the supply-demand gap “more apparent.” Should U.S.-Iran negotiations stall, this growing gap could bolster oil prices in the near term. Supply-Demand Gap Under Hormuz Strait Disruption: The report assesses risks by dissecting alternative pathways for offsetting the approximately 20.5 million b/d of oil flow through the Strait of Hormuz. Through Saudi pipelines (5 million b/d), UAE pipelines (700,000 b/d), and releases from the U.S. Strategic Petroleum Reserve and IEA reserves, the initial shortfall can be reduced to a residual gap of about 9 million b/d. If the strait remains severely blocked, Brent crude prices—which stood at around $114/bbl at the end of April—are projected to surge sharply to approximately $150/bbl by late May. Iranian Situation Analysis: U.S. sanctions targeting Iranian ports are beginning to take effect, with Iran’s crude loading volumes steadily declining. While it remains uncertain how much storage capacity Iran still possesses, constrained storage could force production cuts. However, the report notes that Iran significantly cut output between 2018 and 2020 before gradually recovering from 2020 to 2025, and that the country has domestic refining capacity sufficient to absorb roughly its usual production levels. China’s Crude Oil Reserve Status: In the 18 months leading up to the conflict, China accumulated approximately 1.3 billion barrels of crude oil reserves, equivalent to 76 days of demand or over 100 days of imports. Currently, China’s Strategic Petroleum Reserve (SPR) holds about 400 million barrels, roughly matching four months’ worth of Middle Eastern imports prior to the conflict. Despite disruptions in the Middle East, China’s inventories remain stable, providing a buffer against potential shocks.

Analysis framework

The report employs an analytical framework combining supply-demand balance with inventory tracking. First, it examines global and regional inventories, using high-frequency data sources such as Kpler, EIA, and IEA to monitor monthly and even weekly changes, distinguishing between visible and non-visible inventories. The report points out that non-OECD inventories—relatively delayed and difficult to track in real time—account for roughly 25% of global totals; when drawdown occurs primarily in these areas, the perceived size of the supply-demand gap is underestimated. By contrast, once drawdown shifts to OECD onshore inventories, the gap becomes “visible,” influencing market expectations and pricing. Second, the report constructs scenario analyses for logistical disruptions in the Strait of Hormuz. It systematically offsets the initial supply disruption of approximately 20.5 million b/d by accounting for alternative pipelines, detours, and releases from national strategic reserves, ultimately arriving at a “residual gap” of around 9 million b/d. This bottom-up logistics decomposition helps gauge the true magnitude of supply-side impacts under extreme geopolitical events. Furthermore, the report uses scatter plot regression to demonstrate the inverse relationship between overall inventory levels and Brent crude prices: for every decline in total global inventories, oil prices rise accordingly. This direct linkage between absolute inventory levels and price serves as a core mechanism for translating supply-demand gaps into price forecasts.

Methodology notes

• Industry/sector analysis frameworkSupply-demand framework

  Supply-demand balance and inventory tracking

  By monitoring monthly changes in global and regional oil inventories, the report infers supply-demand gaps. It emphasizes distinguishing between relatively delayed non-OECD inventories and more timely OECD onshore inventories, since shifts in drawdown toward the latter make the supply-demand gap more apparent, thereby shaping market expectations and pricing.

• Industry/sector analysis frameworkVolume-price decomposition

  Inverse correlation between inventory levels and prices

  The report illustrates the negative correlation between global total inventory levels and Brent crude prices via scatter plots: lower inventories correspond to higher prices. This principle forms the cornerstone of converting inventory trends into oil price predictions.

• Industry/sector analysis frameworkUpstream-Midstream-Downstream Supply Chain Transmission

  Scenario analysis of logistical disruptions in the Strait of Hormuz

  Through a bottom-up logistics decomposition approach, the report evaluates the actual supply-side impact of extreme geopolitical events. By offsetting initial supply disruptions through alternative pipelines, detours, and releases from national strategic reserves, it arrives at a residual gap. This method quantifies the tangible effects of geopolitical incidents on supply chains.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global Major Oil Companies

  Benefit from anticipated oil price increases

  Strengths

  Accelerating global oil inventory drawdown and expanding supply-demand gap are expected to support oil prices in the near term

  Risks

  Oil prices are highly volatile, subject to unpredictable events such as natural disasters and geopolitical tensions

Key data

• March Global Visible Inventory Drawdown3.1 million b/dThe rate of visible inventory drawdown in March
• April Global Visible Inventory Drawdown1.6 million b/dDrawdown slowed in April due to shift toward non-OECD inventories, which lag behind in reporting data
• Strait of Hormuz Oil Flow20.5 million b/dInitial oil flow through the Strait of Hormuz
• Residual Gap After Scenario Analysis9 million b/dRemaining gap after accounting for alternative routes and SPR releases following a hypothetical disruption in the Strait of Hormuz
• Brent Crude Price (End of April)Approximately $114/bblBrent crude price at the end of April
• Projected Brent Crude Price (End of May by UBS)Approximately $150/bblIf the Strait of Hormuz remains severely blocked, UBS estimates Brent prices could surge dramatically by late May
• China’s Crude Oil Inventory (Accumulated Before Conflict)Approximately 1.3 billion barrelsEquivalent to 76 days of demand or over 100 days of imports
• China’s Strategic Petroleum Reserve (SPR)Approximately 400 million barrelsEquivalent to four months of Middle Eastern imports prior to the conflict
• Baseline Demand Response Assumption for May-2.3 million b/dUBS assumes May’s demand response will mirror April’s at -2.3 million b/d; a lower-demand scenario would imply a 4-million-b/d drop

Impact & implications

The report concludes that the accelerated drawdown of global oil inventories and the increasingly visible supply-demand gap will support oil prices in the short term. Particularly if oil flows through the Strait of Hormuz remain severely restricted and U.S.-Iran negotiations fail to progress, oil prices could spike sharply. For China, its substantial pre-existing inventory and strategic petroleum reserves enable it to maintain stable stockpiles amid ongoing Middle East tensions, providing a degree of resilience. Meanwhile, Iran may face pressure to cut production if U.S. sanctions constrain its storage capacity, though historical experience suggests it can internally manage its output levels.

Risks

• Oil prices exhibit extreme volatility across short-, medium-, and long-term horizons, often influenced by inherently unpredictable factors—including natural disasters
• Analyses rely on numerous assumptions, and differing assumptions may lead to significant variations in outcomes
• Uncertainty remains regarding whether oil flows through the Strait of Hormuz can resume

What to watch

• May’s OECD onshore inventory drawdown data (to verify whether the supply-demand gap has indeed become more apparent as expected)
• Progress in U.S.-Iran negotiations (which could ease upward pressure on oil prices if successful)
• Effectiveness of U.S. sanctions on Iranian ports and vessels, along with changes in Iran’s crude loading volumes
• Whether Iran’s remaining storage capacity suffices to sustain operations or if it will be forced to reduce production
• Whether oil flows through the Strait of Hormuz can recover (the report assumes flows will resume for the remainder of the year)