By: Jon Costello
I’m increasingly befuddled by the stock market’s continued strength.
I look at the risks building in the energy market, consider what prolonged shortages and higher fuel prices could do to the economy, and then look at market valuations that seem to leave little room for disappointment. I cannot reconcile the two, and it has been gnawing at me for weeks.
I’m not arguing that markets have to fall, or that I have weighed every risk correctly. But when I consider how much has to go right at today’s valuations—and how many troubling developments in the energy market would have to reverse—the market’s confidence gets harder to understand by the day.
My concern is that the longer the energy supply disruptions persist, the greater the risk that the damage spreads beyond oil and into the broader economy. At the very least, that possibility seems increasingly difficult to dismiss.
I want to explain what concerns me and, more importantly, how it is influencing my decisions. For now, I remain constructive on selective energy investments, comfortable holding cash, and focused on researching businesses I would want to own if a substantial decline creates better prices. I would rather decide what I want to own and what I would be willing to pay before falling markets make those decisions more urgent.
Less Room to Absorb Another Disruption
The oil market has less room to absorb another disruption than it did even a few weeks ago. Supply losses persist while the inventories that absorbed earlier disruptions continue to be drawn down.
Last week’s attacks shut Saudi Arabia’s East-West pipeline, a major route for moving crude to the Red Sea without transiting the Strait of Hormuz. Reuters reported that export-ready stocks at Yanbu could cover only five to seven days and that a persistent outage could put 4% of global supply at risk. By September 15, Reuters reported Saudi Aramco had canceled some European cargoes. The timing of a restart remains uncertain. Five to seven days is not much of a buffer, yet the market seems to be treating it as another routine supply headline.
The pipeline has been especially important because shipping through Hormuz remains constrained. Losing that alternative route makes it harder for Saudi Arabia to restore reliable exports even if crude is available.
On the inventory front, the IEA’s September Oil Market Report estimates that observed global oil inventories fell by 507 million barrels from February through August, an average draw of 2.8 million barrels per day. It forecasts 2026 supply averaging 100.7 million barrels per day, with Middle Eastern supply not fully recovering until 2027.
The SPR provided another important buffer, and much of that has now been used as well. The SPR held about 285 million barrels at the end of the week of September 4, down from roughly 398 million barrels at the end of April. That is a decline of more than 110 million barrels in a little over four months. Much of the oil was released through exchanges, which means those barrels must eventually be returned to the reserve along with additional barrels as a premium. While the exchanges helped relieve the immediate shortage, they did not create new supply. They simply shifted some of the burden into the future, while leaving considerably less oil in the reserve to respond to another disruption.
Industry leaders are highlighting these developments. Chevron (CVX) CEO Mike Wirth warned that the crude-oil buffers that moderated earlier price increases were largely depleted.
Taken together, these conditions leave the market with less ability to absorb additional supply losses without either a simultaneous supply recovery or higher prices that force demand lower.
