The oil market faces the risk of a major shock as high interest rates cause traders to dump inventories
The oil market is vulnerable to a shock as high interest rates cause global inventories to thin out, top analyst Amrita Sen warned inSuch destocking is keeping oil prices low for now, but she predicted commercial supplies eventually will drop to their lowest level in over a decade, leaving little cushion for any market surprises.
"For oil refineries and trading companies, the cost of holding oil in tanks has become much more expensive," Sen wrote."And increased financing costs also mean that the penalty for being caught with unsold product is higher than before." In 2000 for instance, the US was similarly raising rates amid falling oil output from OPEC. As a result, oil supply in developed regions dropped by 6%.
Meanwhile, traders are further disincentivized from keeping oil in storage by today's backwardation, a situation in which oil prices trade at a higher rate short term than in the longer term. In Asia, Sen noted some refiners are worried destocking has gone too far and are looking to rebuild inventories with Saudi crude, despite recent price hikes.
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