Our Global Commodities Strategist Martijn Rats discusses how the
Strait of Hormuz shutdown has created a deep air pocket that will
likely keep markets tighter and prices higher for longer than
many expect.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan
Stanley’s Global Commodities Strategist. Today – an update on the
global impact on the Strait of Hormuz shutdown.
It’s Tuesday, March 24th, at 3pm in London.
More than three weeks into the Iran conflict and the Strait of
Hormuz disruptions, the numbers are striking. Normally, around 35
oil tankers leave the Gulf each day. Today, that number is closer
to zero to two. That amounts to a shock. In fact, we estimate
this event has disrupted roughly 20 percent of global oil supply
– double the scale of the Suez crisis in the 1950s.
Now, you might think: can’t the system adapt? Can’t oil just flow
another way? At first, oil kept moving by being stored on ships
already inside the Gulf. But that buffer is now full. Floating
storage has surged in the area to over 120 million barrels, and
new loadings have effectively stopped. Once storage is filled,
producers have no choice but to cut output – and that’s exactly
what we’re seeing. About 10 million barrels per day of upstream
oil and gas production is now offline.
Now once we reach this point, the Hormuz closure becomes a real
supply loss. There are some partial workarounds. Pipelines that
bypass the Strait. Strategic reserve releases. Possibly, naval
escorts at some point to help ships move along. But
unfortunately, none of these fully solve the problem. Even after
accounting for all these offsets, the market still faces a
shortfall of around 10 to 12 million barrels per day. Now, that
is more than three times the supply shock markets feared in 2022,
when Brent oil prices surged to around $130 a barrel.
And beyond crude oil, the supply strain is showing up even more
in refined products. Now, how so? By comparison, crude oil is
still flexible. One barrel can sometimes be substituted with
another. But refined products – like jet fuel or petrochemical
feedstocks – are much more specific. They’re harder to replace
quickly. And we’re already seeing acute shortages.
Europe relies on imports for about 37 percent of its jet fuel
needs, and those flows have now declined sharply. Middle East
exports of naphtha, a key input for plastics and chemicals to
destinations in Asia, have fallen from about 1.2 million barrels
per day to almost zero. And in shipping hubs like Singapore,
marine fuel prices have surged dramatically, with some fuels
exceeding $250 per barrel. Once fuel shortages hit logistics, the
disruption spreads beyond energy to affect the movement of goods
across the economy.
So where does this leave us? We envision two broad scenarios.
First, a reopening. Even if the Strait reopens relatively
quickly, say within one to two weeks, the system doesn’t just
snap back. There’s what we call an air pocket in the system – a
gap created by delayed shipments, empty inventories, and
disrupted supply chains. In that case, oil prices are still
likely to stay elevated throughout the second and third quarters,
rather than quickly returning to pre-crisis levels which were
about $70 per barrel at the time.
A second scenario would be a prolonged closure. If the disruption
continues, the market shifts from substitution to rationing. And
rationing means demand has to fall. Historically, that only
happens at much higher prices – typically in the range of $130 to
$150 per barrel.
Now given all this, we’ve revised our base case forecasts higher.
We now expect Brent oil prices to average around $110 per barrel
in the second quarter, easing only slightly to $90 in the third
and $80 by the fourth quarter. But it’s key to realize that
reopening the Strait is not the same as repairing the system.
This supply chain shock to the oil market will take time to
unwind.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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