Our analysts Andrew Sheets and Martijn Rats discuss why a
prolonged disruption of oil flow through the Strait of Hormuz
would be unprecedented—and nearly impossible for the market to
absorb.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Global Head of Fixed Income Research
at Morgan Stanley.
Martijn Rats: I'm Martijn Rats, Head of
Commodity Research at Morgan Stanley.
Andrew Sheets: Today on the program we're going
to talk about why investors everywhere are tracking ships through
the Strait of Hormuz.
It's Wednesday, March 11th at 2pm in London.
Andrew Sheets: Martijn, the oil market, which is
often volatile, has been historically volatile over the last
couple of weeks following renewed military conflict between the
United States and Iran.
Now, there are a lot of different angles to this, but the oil
market is really at the center of the market's focus on this
conflict. And so, I think before we get into the specifics, I
think it's helpful to set some context. How big is the global oil
market and where does the Persian Gulf, the Strait of Hormuz fit
within that global picture?
Martijn Rats: Yeah, so the global oil
consumption is a little bit more than a 100 million barrels a
day. But that splits in two parts. There is a pipeline market and
there is a seaborne market. And when it comes to prices, the
seaborne market is really where it's at. If you're sitting in
China, you're buying oil from the Middle East, all of a sudden,
it's not available. Sure, if there is a pipeline that goes from
Canada into the United States, that doesn't really help you all
that much.
Andrew Sheets: So, it's the oil on the ships
that really matters.
Martijn Rats: It's the oil on ships that is the
flexible part of the market that we can redirect to where the oil
is needed. And that is also the market where prices are formed.
The seaborne market is in the order of 60 million barrels a day.
So, only a subset of the 100 [million]. Now relative to that 60
million barrel a day, the Strait of Hormuz flows about 20
[million]. So, the Strait of Hormuz is responsible for about a
third of seaborne supply, which is, of course, very large and
therefore, you know, very critical to the system.
Andrew Sheets: And I think an important thing we
should also discuss here, which we were just discussing earlier
today on another call, is – this is a market that could be quite
sensitive to actually quite small disruptions in oil. So, can you
give just some sense of sensitivity? I mean, in normal times,
what sort of disruptions, in terms of barrels of oil, kind of,
move markets; get investors' attention?
Martijn Rats: Yeah, look, this is part of why
this situation is so unusual, and oil analysts really sort of
struggle with this. Look normally, at relative to the 100 million
barrels a day of consumption, we care about supply demand
imbalances of a couple of 100,000 barrels a day. That becomes
interesting.
If that, increases to say 1 million barrel a day, over- or
undersupplied, you can expect prices to move. You can expect them
to move by meaningful amounts. We can write research; the clients
can trade. You have a tradable idea in front of you. When that
becomes 2 to 3 million barrels a day, either side, you have major
historical market moving events.
So, in [20]08-09, oil famously fell from over 100 [million] down
to something like 30 [million], on the basis that the oil market
was 2-2.5 million barrel day oversupplied for two quarters. In
2022, we all thought – this actually never happened, but we all
thought that Russia was going to lose about 3 million barrel day
of supply. And on that basis, just on the basis of the
expectation alone, Brent went to $130 per barrel. So, 2-3
[million] either side you have historically large moves. Now
we're talking about 20 [million].
Andrew Sheets: And I think that's what's so
striking. I mean, again, I think investors, people listening to
this, they can do that arithmetic too. If this is a market where
2 to 3 million barrels a day have caused some of the largest
moves that we've seen in history, something that's 20 [million]
is exceptional. And I think it's also fair to say this type of
closure of the Strait [of Hormuz] is something we haven't seen
before.
Martijn Rats: No, which also made it very hard
to forecast, by the way. Because the historical track records did
not point in that direction, and yet here we are. The historical
track record – look, you can look at other major disruptions
historically.
The largest disruption in the history of the oil market is the
Suez Crisis in the mid-1950s that took away about 10 percent of
global oil consumption. This is easily double that. So really
unusual. If you look at supply and demand shocks of this order of
magnitude, you can think about COVID. In April 2020, for one
month, at the peak of COVID, when we're all sitting at home.
Nobody driving, nobody flying. Yeah, we lost very briefly 20
million barrels a day of demand. Now we're losing 20 million
barrels a day of supply. So, look, the sign is flipped, but it's
in the same order of magnitude. And yeah, these are unusual
events that you wouldn't actually, sort of, forecast them that
easily. But that is what is in front of us at the moment.
Andrew Sheets: So, I think the next kind of
logical question is if shipping remains disrupted, and I'd love
for you to talk a little bit about, you know, you're sitting
there with satellite maps on your screen tracking shipping, which
is – a development. But, you know, what are the options that are
available in the region, maybe globally to temporarily balance
this supply and create some offset?
Martijn Rats: Yeah. So, like of course when we
have a big disruption like this one, of course the market is
going to try to solve for this. There are a few blocks that we
can work with. I'll run you through them one by one, including
some of the numbers. But very quickly you arrive at the
conclusion that this is; this puzzle – we can't really solve it.
Like in 2022, the market was very stressed. We thought Russia was
going to lose 3 million barrels a day of supply, but we could
move things around in our supply demand model. Russia oil goes to
China and India. Oil that they buy, we can get in Europe, we can
move stuff around to kind of sort of solve a puzzle.
This puzzle is very, very difficult to solve. So, through the
Strait of Hormuz, 15 million barrels a day have crude, 5 million
barrels a day of refined product, 20 million barrels a day in
total. What can we do?
Well, the biggest offset, is arguably the Saudi EastWest
pipeline. Saudi Arabia has a pipeline that effectively allows it
to ship oil to the Red Sea at the Port of Yanbu, where it can be
evacuated on tankers there. That pipeline has a capacity of 7
million barrels a day. We think it was probably already flowing
at something like 3 million barrels a day. So, there's probably
an incremental 4 [million] that can become available through
that. That's the biggest block, that we can see of workaround
capacity, so to say.
After that the numbers do get smaller. The UAE has a pipeline
that goes through Fujairah that's also beyond the Strait of
Hormuz. We think there is maybe 0.5 million barrel a day of
capacity there. Then you're basically, sort of, done within the
region, and you have to look globally for other sources of oil.
If there are sanctions relief, maybe on Russian oil, you can find
a 0.5 million barrel day there. Here, there and everywhere.
100,000 barrels a day, 200,000 barrels a day. But the numbers
get…
Andrew Sheets: It’s still not… So, if you kind
of put all of those, you know, kind of, almost in a best-case
scenario relative to the 20 million that's getting disrupted.
Martijn Rats: If you add another one or two from
a massive SPR release, the fastest release from SPR…
Andrew Sheets: That's the Strategic Petroleum
Reserve.
Martijn Rats: Yeah, exactly. Earlier today, we
got an announcement, that the IEA is proposing to release 400
million barrels from Strategic Reserve across its member
countries. That is a very large number. But – and that is
important. But more important is how fast can it flow because the
extraction rate from these tanks is not infinite. The fastest
ever rate of SPR release is only 1.3 million barrels a day. Now,
maybe the circumstances are so extraordinary, we can do better
than that and we can get it to 2 [million]. But beyond that,
you're really in very, very uncharted territory.
So maybe in the region, work around sanctions relief, SPR
release, we can probably find like 7 million barrels a day out of
a problem that is 20 [million]. You're left with another 13
[million]. The 13 [million] is four times what we thought Russia
would lose. So, you're left with this conclusion: Look, this
really needs to come to an end.
Andrew Sheets: And the other rebalancing
mechanism, which again, you know, when we come back to markets
and forecasting, this is obviously price. And, you know, you talk
about this idea of demand destruction, which I think we could
paraphrase as – the price is higher so people use less of it and
then you can rebalance the market that way.
But give us just a little sense of, you know, as you and your
team are sitting there modeling, how do you think about, kind of,
the price of oil? Where it would need to go to – to potentially
rebalance this the other way.
Martijn Rats: Yeah, that price is very high. So,
what it's a[n] really interesting analysis to do is to look at
the historical frequency distribution of inflation adjusted oil
prices.
You take 20 years of oil prices. You convert it all in money of
the day, adjusted for inflation, and then simply plot the
frequency distribution. What you get is not one single bell curve
centered around the middle with some variation around the
midpoint. You get, sort of, two partially overlapping bell
curves.
There is a slightly larger one, which is, sort of, the normal
regime. Lower prices, 60, 70, 80 bucks. There's a lot of density
there in the frequency distribution, that's where we are
normally. What's interesting is that actually, if you go from
there to higher prices, there are prices that are actually very
rare in inflation adjusted terms.
Like a [$] 100-110. In nominal terms, we might feel that that has
happened. In inflation adjusted terms, these prices are extremely
rare. They are way rarer than prices that live even further to
the right. [$]130, 140.
The oil market has this other regime of these very high prices.
If you go back in history, when did those prices prevail? They
always prevailed in periods where we asked the same question.
What is the demand destruction price? And yeah, to erode demand
by a somewhat meaningful quantity, yeah, you end up in that
regime. These very high prices, like [$]130. And it's… It's not a
gradual scale. You sort of at one point shoot through these
levels and that's where you then end up.
Andrew Sheets: It's quite, quite serious stuff.
Martijn Rats: Well, yeah. Also, because we can
casually say in the oil market, ‘Oh, demand erosion has to be the
answer.’ But we don't erode demand in isolation. Like, you know,
diesel is trucking. Yeah, jet is flying. NAFTA is petrochemicals.
Andrew Sheets: These are real core parts of
economic activity.
Martijn Rats: It's all GDP.
Andrew Sheets: So maybe Martijn, in conclusion,
let me give you a slightly different scenario. Let's say that the
conflict goes on for another couple of weeks, but then there is a
resolution. Traffic goes back to normal. Walk us through a little
bit of what that would mean. You know, kind of how long does it
take to get back to normal in a market like this?
Martijn Rats: Yeah. So, if you say, weeks, I
would say that is an uncomfortable period of time actually.
Andrew Sheets: Feel free to use a slightly
different scenario.
Martijn Rats: If you say days. Let's say next
week something happens, the whole thing comes soon to end. Look,
then we will have logistical supply chain issues. But look, we
can work through that.
There is at the moment somewhat of an air pocket in the global
oil supply chain. There should be oil tankers on their way to
refineries for arrival in April and May that currently are not.
So, we will have hiccups and things need to be rerouted and we
draw on some inventories here or there, but… And that will keep
commodity prices tense, I would imagine. The equity market will
probably look through it.
We'll have a month or six weeks, not more than two months, I
would imagine of logistical issues to sort out. Look, of course,
if that, you know, doesn't happen, then we're back in the
scenario that we discussed. But yeah, look, that that's equally
true. If it's short, we can sort of live with a disruption.
Andrew Sheets: It's fair to say that this is a
situation where days really matter, where weeks make a big
difference.
Martijn Rats: Oh, totally. Look, the oil
industry has built in various, sort of, compensatory measures, I
think. You know, inventories along the supply chains. But nothing
of the scale that can work with this. I mean, this is truly yet
another order of magnitude.
Andrew Sheets: Martijn, thank you for taking the
time to talk.
Martijn Rats: My pleasure.
Andrew Sheets: And thank you as always for your
time. If you find Thoughts on the Market useful, let us know by
leaving review wherever you listen. And also tell a friend or
colleague about us today.
Important note regarding economic sanctions. This report
references jurisdictions which may be the subject of economic
sanctions. Readers are solely responsible for ensuring that their
investment activities are carried out in compliance with
applicable laws.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.