UBS Warning: Oil Prices Fears 'Violent Repricing' Once Inventory Cushion is Depleted

The United States is depleting its crude oil inventories at a historically rapid pace, and the massive sale of Strategic Petroleum Reserves (SPR) to suppress oil prices is accumulating greater upward risks for the market.

UBS analyst Arend Kapteyn warned in a detailed report released on Friday that once the global inventory buffer is exhausted, the potential for oil price increases will greatly expand and become difficult to predict.

Data shows that this week, the combined U.S. commercial crude oil inventory and SPR decreased by 17.8 million barrels, marking the largest single-week drop since records began in 1982. The SPR alone drew 9.92 million barrels last week, also setting a historical record. The total U.S. crude oil inventory has fallen to its lowest point since June 2025, with the inventory in the Cushing area approaching the lower limit of operability once again. Globally, the average rate of visible inventory loss from May to date has reached 8.7 million barrels per day, also a historical peak.

UBS calculated that, after accounting for the SPR hedging, the global net supply loss caused by the blockade of the Strait of Hormuz is still as high as about 9 million barrels per day, equivalent to a 9% global supply disruption. If SPR injections are deducted, the actual supply gap is close to 12%, and the reasonable oil price should be around $123 per barrel, significantly higher than the current market price of about $105.

At the core of UBS's warning is not just the supply gap, but the marginal reduction in demand elasticity. The current market's implicit demand price elasticity is about -0.2, meaning that for every 1% increase in oil prices, demand decreases by about 0.2%. As easy-to-achieve energy-saving alternatives on the production and consumption ends are gradually depleted, this elasticity will tend to contract, and then the same magnitude of supply gap will cause a greater price impact.

UBS scenario simulations show: if the supply gap expands to 14% and elasticity remains at -0.2, oil prices will rise to $140 per barrel; if elasticity contracts to -0.15, the corresponding oil price is about $208; under a more extreme assumption that elasticity further drops to -0.1, the model's calculated value is close to $372 per barrel. UBS clearly classifies the latter two scenarios as tail risk simulations, not base forecasts.

The energy think tank Rapdan Energy Group previously warned that the impact of a long-term blockade of the Strait of Hormuz on the global economy could be on a scale comparable to the 2008 financial crisis.

For the Trump administration, with the midterm elections approaching, pushing for an agreement between the U.S. and Iran to reopen the strait before the inventory buffer bottoms out has become the highest priority policy objective.