The oil market faces the risk of a major shock as high interest rates cause traders to dump inventories

• Oil inventories are falling as high interest rates make the price of storage costly, top analyst Amrita Sen wrote.
• That could expose the oil market to a major shock, she warned in the Financial Times.

The oil market is vulnerable to a shock as high interest rates cause global inventories to thin out, top analyst Amrita Sen warned in The Financial Times.

Such 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.

This trend is the result of tightening monetary policy, the Energy Aspects co-founder said. Higher rates have forced traders to pay more in financing to hold onto oil-storage consignments.

"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 (should a recession eventually cause demand to slow) is higher than before."

Historically, a 1 percentage point rise in interest rates among developed economies would move crude stocks down by an average 10 million barrels year-on-year, she wrote.

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%.

Sen pointed out a similar dynamic is playing out now, but with a more hawkish Federal Reserve and OECD crude supplies running below the 2010-2019 average.

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.

"The market is on thin ice," she said.

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.

Meanwhile, US inventories remain thin after the federal government tapped the Strategic Petroleum Reserve last year to lower prices.

"All this will leave the market vulnerable to shocks and unexpected Opec+ policy moves by the end of the year," she said. "Buckle up!"