As the Brent Crude Oil price pushes higher, the IEA is proposing a record release of 300-400 barrels from reserves. In his latest analysis, Daniel Casali, Chief Investment Strategist at Evelyn Partners, outlines why inventories matter and what this means for investors.
Casali comments: “The escalating conflict between the United States and Iran has pushed investors into a period where geopolitics, rather than fundamentals, are increasingly driving markets. In such moments, investors must focus on variables that buy time and delay binding constraints.
“These include inventories of oil and munitions. In this crisis, oil inventories buy some time for the global economy, while US/allied munitions inventories give time for military strategy. Iran’s large, dispersed stockpiles similarly extend its ability to sustain conflict, potentially raising both its duration and severity.”
Strategic reserves as the first line of defence
The global stock of crude and refined oil remains the world’s main shock absorber. With the Strait of Hormuz (SoH) partially or fully closed, inventory capacity has become the central macro variable. The International Energy Agency (IEA) member countries are preparing what could be a record Strategic Petroleum Reserve (SPR) release of 300–400 million barrels. The IEA’s 1.8 billion barrels provide a buffer equivalent to more than 120 days of crude stranded east of Hormuz. The SPR is operating exactly as designed, a bridge that buys time before a structural shortage emerges.
But this headline figure overstates usable supply. Inventories are unevenly distributed, constrained by refining limitations, and not fungible across fuel types. Once operational frictions are considered, the effective buffer shrinks. Oil inventories buy time, but the asset is finite and steadily depleting, leaving the system vulnerable if the SoH stays shut longer than expected.
Domestic politics: The US political cycle may expire before oil and munitions inventories . Rising gasoline prices are adding pressure as President Trump enters the months leading up to the US mid-term election in November. Betting markets now show Republicans losing majority control of the House and the Democrats narrowing the gap with the Republicans in the Senate, reflecting concerns that the administration has less capacity to absorb new shocks.
Munitions inventories: the binding constraint on US strategy
If oil inventories protect the economy, then stockpiles of munitions underpin US military strategy. Yet these systems are being depleted at a pace that current production cannot sustain. Iran employs very cheap, easily replaced drones and missiles, creating a stark mismatch: low‑cost attacks versus high‑cost defences. This asymmetry is rapidly draining US interceptor inventories. Over a thousand Patriot PAC‑3 interceptors have already been fired (nearly double annual output) and even high‑value assets such as a radar for a THAAD missile defence system have been struck.
Iran’s objective is to saturate or at least stress regional air‑defence networks with large volumes of low‑cost munitions. However, continuous barrages aren’t necessary. Intermittent launches are enough to keep the Strait of Hormuz effectively constrained by sustaining elevated insurance premiums and reduced shipping throughput. Even if 90% of Iran’s manufacturing capacity were degraded, Tehran could potentially still maintain a high rate of fire for months. The result would be higher energy and fertiliser prices, rising inflation expectations and the risk that central banks tighten policy despite weakening growth. Under such conditions, the probability of a global recession would increase sharply.
China’s role in managing regional tensions
China’s influence is central here. As Iran’s diplomatic backer and largest energy customer, Beijing has influence over Tehran. Whether China seeks de‑escalation or sees advantage in extended US strain remains unclear. Ironically, China could turn the art of the deal against Trump.
Nevertheless, China also imports vast amounts of Middle Eastern oil, giving it strong incentives to avoid a prolonged disruption. This tension measured as pressure on Washington versus protection of its own energy security, explains Beijing’s ambiguity.
A durable path out of this crisis may require high‑level diplomacy. The Trump-Xi meeting in Beijing later this month may be the first real opportunity for a negotiated de‑escalation in the Middle East.
What this means for investors
The conflict is potentially a stagflationary shock the severity of which depends on its length and export volumes while the SoH remains closed. Oil inventories buy time, but as they erode, risks of higher energy prices, rising inflation and market volatility increase.
For investors, diversification and explicit geopolitical hedges remain essential. These include gold, hedge funds, inflation‑linked bonds, short‑duration sovereign bonds and energy equities. While oil inventories remain the primary shock absorbers, maintaining robust portfolio hedges is critical.
