BT Explainer: Are shrinking oil inventories quietly increasing risks for global energy markets?

The global oil market appears stable — but the source of that stability has shifted. Instead of fresh supply, it is inventories that are quietly absorbing the shock.

“In this war-driven oil shock, inventories have become the market’s primary balancing mechanism. Unlike a typical disruption where spare production capacity can be mobilized quickly, the location of the shock and the scale of current supply losses mean the immediate adjustment has to come from barrels already in storage. Put simply, inventories are acting as the shock absorber of the global oil system. The crisis began with stocks in relatively strong shape. Global inventories surged in 2020 and 2021 during the COVID demand collapse, then drew sharply through 2022 and 2023 as economies reopened, Russia invaded Ukraine, and markets tightened. That tightening phase reversed in 2024 and 2025, when supply once again outpaced demand, allowing stocks to rebuild.”

These observations come from JPMorgan’s latest Oil Flash Note titled “The illusion of plenty”, which explains why the global oil market is currently leaning on inventories rather than fresh supply.

Why inventories matter now

In a conventional oil shock, such as a sudden outage or geopolitical disruption, major producers, especially OPEC nations, typically increase output to stabilise markets. This spare capacity acts as the first line of defence.

However, the current disruption is structurally different. The geography and scale of supply losses make it difficult to quickly ramp up production. As a result, the market is relying on existing stockpiles of oil, both commercial and strategic, to bridge the gap between supply and demand.

At the start of 2026, global inventories stood at around 8.4 billion barrels, providing a strong initial buffer. But this headline number can be misleading.

The “illusion of plenty”

Despite large total inventories, only a fraction of these barrels is readily usable. Much of the oil is tied up in operational requirements — such as pipeline flows, minimum storage levels, or logistical constraints.

This is why JPMorgan calls it an “illusion of plenty.” On paper, supply appears comfortable. In reality, the volume of accessible, flexible inventory is far smaller, making the system more fragile than it looks.

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How the system adjusts

Inventory drawdowns happen in stages. The market first taps:

• Oil already in transit or floating storage (fastest to access)
• Commercial onshore inventories
• Strategic reserves (used sparingly and often coordinated by governments)

As these layers are depleted, the cost of accessing additional barrels rises—both economically and politically.

What happens when inventories fall

The key risk is not that the world runs out of oil, but that it runs low on working inventories — the oil needed to keep supply chains functioning smoothly.

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When inventory levels approach operational limits:

• Supply chains become less flexible
• Refiners struggle to secure the right crude
• Price volatility increases

At this stage, the market shifts from a supply-driven adjustment to a price-driven one, where higher prices reduce demand—a process known as demand destruction.

Impact of the shock

Inventories are currently cushioning the impact of a major supply shock, buying time for the market. But they are not a permanent solution.

As JPMorgan’s report highlights, once this buffer weakens, the oil market could quickly transition from apparent stability to tight supply, higher prices, and increased volatility — revealing that the sense of comfort was, in fact, temporary.

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