Oil production halts loom as Gulf storage facilities rapidly fill towards capacity

US President Donald Trump has said that he thinks the conflicts in Iran will go on for about a month. However if it lasts only four weeks then all of Iraq, Kuwait, UAE, and Qatar will be forced to shut down production after they run out of storage space for the oil production.

The oil fields that line the Persian Gulf have been set up so that they pipe crude directly to the ports and onto ships. None of the countries have invested heavily into storage facilities as the traffic of oil tankers is usually so intense there's no need.

Since the Straits of Hormuz have been shut down on March the 2nd by the Iranian Revolutionary Guard Corps (IRGC) the limited oil storage facilities are filling up fast with no prospect of traffic through the narrow waterway resuming soon.

Iraq is in the worst position as it has only six days of storage capacity, which is already nearly exhausted. Kuwait is slightly better as it has two weeks, but the only one with any extensive storage is the Kingdom of Saudi Arabia; even that only has 36 days before its tanks are full, although it could spin that out for two months in total by rerouting some oil.

As bne IntelliNews reported there is limited pipeline capacity to transport oil westward over the deserts to the Red Sea where it can be picked up by tankers outside the conflict zone. But again, the Gulf states have not invested heavily in this emergency backdoor route which cannot cope with the volumes of oil being produced.

As storage reaches capacity and the tankers are still at anchor then one country after another will be forced to shut down production. Then oil supplies will transition from just a “disruption” to a full blown global energy crisis.

Oil departing from the Persian Gulf accounts for a fifth of global supplies. The relatively modest rise in oil prices so far – the cost of Brent was $82 in the first days of the war, but jumped to $85 on March 5 – is a reflection of traders still seeing the conflict as a “disruption.” However, as soon as oil production is shut down the market is likely to reappraise its status and start pricing oil at crisis levels.

As Iraq’s storage tanks approach capacity, it has already begun reducing crude production, according to reports. Saudi Arabia and the United Arab Emirates could face similar decisions within weeks if export flows are not restored or diverted through alternative pipelines.

Brent crude futures have also climbed above $85 a barrel, the highest level in 19 months, as concerns over tightening global supply build.

Analysts say the total regional storage facilities collectively have roughly 100mn barrels of spare space, although the effective capacity is lower because of operational constraints and the location of tanks relative to export terminals and pipelines.

Key Saudi terminals, including Ju’aymah and Ras Tanura, are among those filling most quickly as unsold crude accumulates. These hubs normally serve as major loading points for tankers bound for Asia and Europe, but have been idle now since the weekend.

JPMorgan analysts warned that the pace of accumulation could soon force broader supply reductions if shipping routes remain constrained. The bank said some producers risk reaching storage limits — or “tank tops” — within just over three weeks unless alternative export routes are activated or flows through the Strait of Hormuz resume.