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On February 28, the US and Israel launched new attacks on Iran targeting primarily the country's leadership, security forces, and missile program.
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The Center on Global Energy Policy at Columbia University SIPA is closely following the escalating conflict in Iran and its implications for US national security, Middle East geopolitics, and global energy markets. See all of our coverage here.
US Treasury Secretary Scott Bessent tweeted on April 22 that Iran’s crude oil storage at Kharg Island would be full in a matter of days, at which point he said Tehran would be forced to shut in oil wells. As the country’s main export terminal by far, Kharg Island accounts for roughly one-fourth of Iran’s total crude storage capacity and 90 percent of export capacity.[1] However, Iran’s experience in building stocks during the Covid crisis, available space at other facilities, and efforts to increase alternate storage and export facilities over the past 10 years suggest the country may not be in imminent danger of a major crude oil shut-in.
Six years ago, the negative oil demand shock from Covid-19 put crude storage capacity in the spotlight. As public-health lockdowns suddenly crushed global oil demand, crude tanks filled rapidly, forcing producers to shut in oil production that had nowhere to go. When US market participants ran out of available storage at Cushing, Oklahoma, the delivery hub for the NYMEX crude oil contract, US crude prices actually turned negative.
Today, the supply shock of the Iran war is once again raising burning questions about storage capacity. When Iran first disrupted tanker traffic in the Strait of Hormuz, those Arab producers with the least available storage capacity and no export alternative to the Middle East Gulf were quick to ramp down production. Iraq, with very limited storage at Basrah and virtually no other short-term export option, was the first to announce shut-ins.
With the United States now restricting marine traffic to and from Iranian ports, Tehran faces the same conundrum. As of April 21, satellite monitoring suggests Iranian crude stocks had risen by more than 6 million barrels since April 13, the start of the US blockade. But the pace of the build had notably accelerated, rising to 1.7 million barrels per day from April 17-21 — consistent with a total or near-total cessation of exports — as US forces tightened the blockade.
Kharg Island accounts for about half of that build. As of April 20, crude stocks at Kharg Island had built by approximately 3 million barrels since the start of the US blockade, bringing storage utilization near 74 percent of design capacity.
Oil companies typically refrain from filling up their storage tanks above 80 percent, a threshold generally considered the maximum operating level. Using that benchmark, Iran would have had less than 3 million barrels of effective spare capacity at Kharg Island as of April 20, or less than two days’ worth of exports (based on average exports of 1.8 million barrels per day in the month prior to the war).
It is not unheard of for producers to exceed those conventional maximum operating levels at a given location under special circumstances, however. Iran itself did so during Covid-19, as did many other producers. Kharg Island stocks reached an all-time high of slightly above 27 million barrels (nearly 90 percent of capacity) in late April 2020, at the peak of the lockdowns. Based on that precedent, Iran would have had nearly 5 million barrels of spare capacity at Kharg Island as of April 20, nearly three days of exports.
Kharg Island is not Iran’s only storage facility, however, and the National Iranian Oil Company has the latitude to divert production to other tank farms. Outside of Kharg, current capacity utilization is not quite as high. As of April 22, total Iranian crude stocks were estimated at approximately 68 million barrels, or 55 percent of nameplate capacity. Using the 80 percent maximum operating capacity level as a reference point, that leaves 31 million barrels of spare capacity, or 17 days of exports. Using Iran’s record high utilization level of 85 percent reached in May 2020, spare capacity would amount to 37 million barrels, or 20 days of exports.
In practice, not all that capacity may be fully utilized, as system inefficiencies rise with operating levels. The fuller the tanks get, the more difficult it becomes in practice to make use of the distribution network and the little spare capacity that remains in the system. On balance, however, Iran has considerably more spare storage capacity available than did Arab Gulf producers at the beginning of the war. That’s because Iran is structually long storage capacity relative to exports, perhaps as part of its contingency planning. Iran has diligently worked to expand its storage capacity and diversify its export options since 2016, when satellite monitoring of oil inventories — and storage capacity — first became commercially available.
That means that even though Kharg Island stocks have already reached relatively high levels, it may still take a while, all other things being equal, before the US blockade forces Iran to shut-in production in a big way — though it will clearly start cutting its export revenue much faster. Rather than being driven to a sudden, catastrophic production drop, Iran can likely manage a more gradual, controlled, and limited ramp-down at some of its fields than is currently assumed in Washington.
Nevertheless, Iran may still opt to curtail production fairly aggressively in the face of the US blockade, but this would be more by choice than by necessity. Doing so would have the advantage of providing Iran with relatively ample spare storage capacity after the shutdown and would allow for a smoother restart of operations once conditions permit, and the constraint is relaxed, thus minimizing adverse impacts from the blockade on longer-term supply.
When the confrontation in the Gulf comes to an end and the Iranian blockade of the Strait of Hormuz is lifted, crude oil inventories will once again come into the spotlight as analysts seek to assess the volumes of crude held at export oil terminals on the Arab side of the Gulf, ready to be lifted as soon as tanker traffic goes back to normal. Those volumes today would cover less than 10 days of pre-war Gulf exports — likely much less than the time needed for Arab Gulf production to return to pre-war levels. In short, even if stranded crude tankers in the Gulf are factored in, the supply gap left by the war will take a long time to fill.
[1] All storage data used in this blog post come from Kayrros, a geospatial intelligence company focused on energy supply chains and climate risks. Antoine Halff is a Kayrros cofounder and chief analyst.
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