Declining US strategic oil reserves and challenges to global supply chains

Crude oil inventories in the US Strategic Petroleum Reserve fell to 283 million barrels last week, their lowest level since October 1982; This is according to data issued by the US Department of Energy.

These withdrawals from stocks come within the framework of a US agreement to release 172 million barrels with member states of the International Energy Agency.

In addition, the administration of US President Donald Trump announced last week that it was offering to lend energy companies 40 million barrels of oil from the Strategic Petroleum Reserve.

Sheikh Nawaf Al-Sabah, CEO of the Kuwait Petroleum Corporation, said that the corporation’s estimates indicate that the market is losing about 6 million barrels per day of refined products at the present time.

The Iran war caused the closure of the Strait of Hormuz, through which about 20 percent of global oil and gas supplies passed, in addition to damage to some energy infrastructure assets in the Gulf states as a result of the war, which reduced production.

Al-Sabah added, at an energy forum in London on Monday, that there is an abundance of crude oil in the market but not refined products. This is after the recent improvement in navigation traffic in the Strait of Hormuz.

He stated: “We need to focus on removing refined products from the Gulf region to relieve bottlenecks in the region’s refineries.”

He pointed out that the Kuwait Petroleum Corporation is holding “conversations with our European partners and informing them that they need logistical services that include storing refined petroleum products.”

He said that this happens when “we use ship-to-ship transfers despite the ongoing attacks... We were able to do this by using our strategic fleet of tankers.”

Al-Sabah stressed that “there is no shortage of crews in our tanker fleet... and we have direct ownership of our tankers,” noting that “some of our customers use their own tankers to come to the Gulf region, and more will follow suit.”

The CEO of the Kuwait Petroleum Corporation explained that the Corporation does not offer discounts or insurance to customers who bring their tankers to the Gulf region.

Regarding production capacity, Al-Sabah said that the corporation is on the right track to achieve the goal of reaching a crude oil production capacity of 4 million barrels per day by 2035.

Kuwait Petroleum Corporation currently produces about two million barrels per day, down from 2.6 million barrels per day before the start of the Iran war.

He stated that his company is holding talks with Saudi Arabia and the UAE regarding pipelines to reach their ports, in order to facilitate increasing oil exports, noting that the corporation is studying “increasing local storage capacity and in our three refineries abroad.”

But he stressed that “pipelines and stocks are no substitute for freedom of navigation through the Strait of Hormuz.” He said that oil importing countries also need to pump investments, not just exporting countries, in reference to the large amount of investments that the global energy sector needs during the coming period.

Service sector activity slowed in the United States during September, with strong domestic demand continuing to pressure supply chains and push up corporate input prices, in a sign that inflation may remain high until next year.

The Institute for Supply Management (ISM) announced on Monday that the purchasing managers index for the non-manufacturing sector fell to 54.9 points in September, from 55.4 points in August, compared to expectations of 55.2 points. A reading above 50 points indicates growth in activity, while the services sector represents more than two-thirds of US economic activity.

Despite the decline, the index remained consistent with strong economic growth during the third quarter, driven by solid domestic demand, especially consumer spending and corporate investments in artificial intelligence and related infrastructure.

The new orders index fell to 59.8 points from 60.9 points in August, but remained at a high level. On the other hand, the supplier delivery index rose to 53.2 points from 51.3 points, a reading that means a slowdown in deliveries for the twenty-second month in a row.

The index of prices paid by service companies for inputs jumped to 74 points from 72.6 points, an increase that reflects growing pressures on companies’ costs. The increase was consistent with a similar rise in the price index in the ISM survey of the manufacturing sector.

Reuters said that the two surveys together indicate the possibility of rising inflation in the coming period, which supports economists’ expectations that the Federal Reserve will raise interest rates in December.

Supply chains are having difficulty keeping up with strong demand, while the war in the Middle East has increased pressure by raising energy prices and causing shortages of some goods that pass through the Strait of Hormuz.

Diesel prices have reached record levels, which, according to economists, may lead to pressures being transferred to sectors beyond transportation and agriculture.

In the labor market, the employment index in the services sector rose to 50.1 points in September from 47.8 points in August, indicating a relative improvement in employment activity. This, in addition to the rise in employment in the manufacturing sector according to the ISM survey last week, supported economists’ estimates that the labor market remains stable despite weak non-agricultural job growth in September.

Last month, the Federal Reserve raised the key interest rate by 25 basis points to a range of 3.75 and 4.00 percent, the first increase in three years, indicating the possibility of continuing to raise borrowing costs. However, the prospects for a rate hike in October declined after the release of lower-than-expected inflation data for July and August, along with a sharp slowdown in non-farm job growth during September.