Episode summary
Oil Markets Ahead: Pricing In More Risk
Thoughts on the Market (Morgan Stanley)
· · Hosts: Andrew Sheets, Martijn Rats
Summary
The discussion centered on the oil-market consequences of continued restrictions through the Strait of Hormuz, with the guest arguing that the shock is already visible in physical fuel markets even if headline Brent futures have moved more slowly. The guest said the earliest stress is showing up closest to the strait, then rippling through Asia, where bunker fuel, jet fuel, and naphtha prices have surged to levels far above recent norms. He argued that those localized price signals and widening spreads across grades and delivery points show a market under real strain.
The guest framed the disruption as historically large: global oil consumption is a bit more than 100 million barrels a day, the seaborne market is about 60 million barrels a day, and roughly 20 million barrels a day normally flows through the strait. Even allowing for Iranian flows, Saudi and UAE pipeline rerouting, and strategic petroleum reserve releases, he said the market would still be left with a double-digit shortage. He compared that scale with prior shocks in 2008 and 2022 and said this event is four or five times larger.
On the future path, the guest said a prolonged closure would require demand destruction and could force Brent toward roughly $150 a barrel in today’s money. If flows resume, prices could fall substantially, but he warned that a partial de-escalation in which Iran remains in control of the route would leave the market with more risk, less spare capacity, and a structurally higher risk premium. He said the United States is better positioned than many countries, but not isolated from a globally connected seaborne oil price.
Key takeaways
- The guest said the first shortages are appearing in nearby markets such as India and Asia, where bunker fuel and jet fuel prices have jumped sharply.
- The guest said roughly 20 million barrels a day normally flows through the Strait of Hormuz, so even partial rerouting still leaves a double-digit supply gap.
- The guest argued the event is larger than past 2 to 3 million barrel-a-day shocks and has no modern historical precedent.
- The guest said a prolonged closure could force Brent toward about $150 a barrel in today’s money through demand destruction.
- The guest said a partial reopening with Iranian control would keep a higher long-term risk premium in oil prices.
Notable quotes
“oil flows through the straight of Hormuz remain restricted, the implications for global energy markets and what may lie ahead”
“global oil consumption is a bit more than 100 million barrels a day”
“of which 20 million barrels a day flows through the straight of moose”
“this event is four or five times larger than that”
“if the straight stays closed at some point consumption needs to decline”
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.
And today in the program, oil flows through the straight of Hormuz remain restricted, the implications for global energy markets and what may lie ahead. It's Wednesday, April 1st at 2 p.m. in London.
So Martin, it's great to sit down with you again. Three weeks ago, we were having this conversation, a conversation that was a little bit alarming about the scale of the disruption of the oil market with the closure of the straight of Hormuz and how that could have ripple effects through the global economy. 3 weeks later, oil is still not flowing.
What is happening and what is maybe surprised you or been in line with expectations over the last couple of weeks? Yeah, many things have been in line with expectations in the sense that we're seeing the effects of the closure of the strait the earliest in regions that are physically the closest to the strait. So we saw the first examples of physical shortages in say the west coast of India.
From there on it's reverberated throughout Asia. Also in Asia we're seeing the type of prices that you would expect. Bunker fuel for shipping somewhere between $150 to $200 a barrel.
Jet fuel over $200 a barrel. NAFTA going into Japan. NAFTA normally trades well below the headline price of Brent now $130 a barrel.
That's more than double what it was in February. So those things tell the story of this historic event. What has been surprising on the other end is how slow the reaction has been in many of the oil prices that we track the most.
like the numbers people will see on the news, you know, it's $100 a barrel maybe as we're talking.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- oil markets
- strait of hormuz
- geopolitical risk
- commodity research
- energy pricing
Watch the episode
Watch “Oil Markets Ahead: Pricing In More Risk” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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