Episode summary
The 20 million Barrels of Oil Conundrum
Thoughts on the Market (Morgan Stanley)
· · 12 min · Hosts: Andrew Sheets, Martijn Rats
Summary
The discussion centered on how unusual it would be if the Strait of Hormuz were disrupted for long, because roughly 20 million barrels a day pass through it, about a third of seaborne oil trade and one-fifth of global consumption. The host and the guest argued that oil markets are normally sensitive to imbalances of only a few hundred thousand barrels a day, while a 2-3 million barrel a day shock has historically produced major price moves. A 20 million barrel a day disruption would therefore be unprecedented and far beyond the market’s usual range.
They ran through possible offsets and concluded that the market cannot fully replace that volume. The biggest regional workaround is Saudi Arabia’s East-West pipeline, which can move about 7 million barrels a day and may have room for an incremental 4 million. Other offsets from the UAE, Russian sanctions relief, and strategic petroleum reserve releases add only smaller amounts, leaving a large gap.
The guest said the only remaining rebalancing mechanism is demand destruction, but that would require very high prices. He pointed to past periods when oil reached the 130-140 range in inflation-adjusted terms, noting that those prices tend to be associated with severe demand erosion rather than a smooth adjustment. If the disruption ends quickly, the market could normalize within roughly a month or six weeks; if it lasts for weeks, the situation becomes much harder to manage.
Key takeaways
- The guest said the Strait of Hormuz carries about 20 million barrels a day, making it one of the largest chokepoints in the oil market.
- The host and guest argued that a 20 million barrel a day shock is far beyond the 2-3 million barrel a day moves that have historically driven major price changes.
- The guest said Saudi Arabia’s East-West pipeline is the biggest workaround, with about 7 million barrels a day of capacity and roughly 4 million barrels a day of incremental room.
- Even after regional workarounds, sanctions relief, and strategic reserve releases, the guest said the market could still be short by about 13 million barrels a day.
- The guest said meaningful demand destruction would likely require very high oil prices, with inflation-adjusted levels around 130-140 associated with that kind of market stress.
Notable quotes
“normally at relative to the 100 million barrels a day of consumption we care about supply demand imbalances of a couple hundred thousand barrels a day”
“Now we're talking about 20”
“this puzzle we can't really solve it”
“The fastest ever rate of SPR release is only 1.3 million barrels a day”
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 Ratz, head of commodity research at Morgan Stanley.
Today on the program, we're going to talk about why investors everywhere are tracking ships through the straight of Hormuz. It's Wednesday, March 11th at 2 p.m. in London.
Martin, 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 markets focus on this conflict. And so, I think before we get into the 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 Stir Hormuz fit within that global picture?
Yeah. So the global oil consumption is a little bit more than 100 million barrels a day, but that splits in two parts. There is a pipeline market and there is a seaborn market.
And when it comes to prices, the seaborn 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.
So it's the oil on ships that really help. — 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. Um the seaborn market is in the order of 60 million barrels a day. So only a subset of the 100.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- oil supply risk
- strait of hormuz disruption
- oil market shock
- energy markets
Watch the episode
Watch “The 20 million Barrels of Oil Conundrum” on YouTube
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