Episode summary
How Long Can Markets Ignore the Oil Supply Shock?
Thoughts on the Market (Morgan Stanley)
· · Hosts: Andrew Sheets, Martin Ratz
Summary
The guest argues that oil is caught between an unusually large supply shock and unusually high buffers. Commodity specialists see the disruption as the largest in the history of the oil market, while generalist investors are focusing on the possibility that it could also be unusually short-lived. The market entered the shock with abundant inventories after a period of oversupply, and those stocks have helped blunt the immediate price response.
Even so, the guest says those buffers are being drawn down quickly. Oil on water has normalized, refined-product inventories are falling broadly, and crude draws are now showing up more clearly in the United States. If flows through the Strait of Hormuz remain impaired for another four to six weeks, the guest expects the market to become very tight by June and early summer, with further tightening possible by August or September if the disruption persists.
The guest dismisses the idea that Venezuelan production can offset the shock at scale. He says Venezuela’s gains are measured in hundreds of thousands of barrels a day at most, versus a disruption of roughly 13 to 14 million barrels a day. He also says the U.S. is not insulated: global crude, gasoline, and diesel flows are pulling more barrels out of the United States, gasoline inventories are falling, and pump prices are rising as summer demand approaches.
Key takeaways
- The guest says the current oil shock is the largest in the history of the market, even though investors still expect it may prove short-lived.
- He says global buffers were unusually high going into the disruption, but oil inventories are now being drawn down rapidly across refined products and in U.S. crude data.
- If Strait of Hormuz flows do not resume within four to six weeks, the guest expects the oil market to be very tight by June and early summer.
- The guest says Venezuelan production increases cannot offset the shock, because even 100,000 to 200,000 barrels a day is small versus a 13 to 14 million barrel-a-day disruption.
- He says the United States is tightly linked to global oil pricing, with crude exports near 5.5 million to 6 million barrels a day and gasoline prices rising at the pump.
Notable quotes
“the size of this supply shock is the largest in the history of the oil market”
“we have been living off these buffers and that has that has helped”
“we are eating through these buffers very very rapidly now”
“if the flow of oil through the straight of which does not resume on the sort of next four to six weeks we will get very very tight by by June early summer”
“Above $5 is historically a point where people get Yeah. worried about demand destruction and it has a real impact”
How the episode opens
Welcome to Thoughts on the Market. I'm Andrew Sheets, global head of fixed income research at Morgan Stanley. I'm Martin Rance, head of commodity research at Morgan Stanley.
Today, oil, oil inventories, and the price at the pump. It's Wednesday, May 6th at 2 p.m. in London.
Martin, it's great to talk to you. We remain in this very unique market where on the one hand, the energy market is severely disrupted. On the other hand, we're making new all-time highs in the stock market.
And part of this debate is a creeping sense that maybe the energy market is just a lot more resilient than many people initially thought. So, let's just jump right into it. As you look at the current state of the world, the state of things, how are you seeing the energy market at the moment?
There are definitely two views in the market. I would say commodity specialist, oil traders, people that trade oil and gas equities for a living tend to focus on the size of the supply shock and it is neither hyperbol nor disputed that the size of this supply shock is the largest in the history of the oil market. They we have the statistical data to back that up.
That is not a controversial statement. But at the same time the other view in the market generally held by your generalist investors who invest across many markets they tend to focus on the likelihood or possibility that this supply shock might also be uniquely short. Um it was there all of a sudden from one day to the next the trade was closed.
It felt a bit man-made so to say. Um it was an outcome of a political decision and that can also be undecided. And so this is the the the towing and throwing in the in the market is like on the one hand this this shock is very very large but the other end it may also be very very short.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- oil supply shock
- iran conflict energy disruption
- markets at record highs
- fixed income
- commodities fundamentals
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “How Long Can Markets Ignore the Oil Supply Shock?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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