Episode summary
The Oil Market’s Billion-Barrel Problem
Thoughts on the Market (Morgan Stanley)
· · 13 min · Hosts: Andrew Sheets · Guests: Martijn Rats
Summary
Oil markets have become violently volatile because multiple chokepoints are constraining supply at once, even beyond renewed tensions around the Strait of Hormuz. The host and Martijn Rats said tanker flows through Hormuz have fallen back to roughly 2 to 3 million barrels a day, down 80% to 90% from normal, after earlier disruptions briefly cleared and then reversed. But the bigger story is that refined products, especially diesel, are tight because of overlapping problems in the Red Sea, attacks on Russian energy infrastructure, and disruption at the CPC terminal.
Rats argued that the market is now feeling the pain more in refined products than in crude. He pointed to diesel at about $1,200 to $1,240 a ton, versus a demand-destruction level closer to $1,400 a ton, and said refiners are capturing a bigger share of the value than crude producers. That matters for the real economy because trucking, shipping, and industrial activity run on diesel, not Brent crude.
His main concern is that the system’s buffers may be running out. Rats said the market has already absorbed more than one and a half billion barrels of supply loss from the Middle East since the conflict began, but observable inventory draws explain only part of that. If disruptions persist into August and September, he thinks the energy system could be close to exhausting its hidden inventories and heading into winter with very little cushion.
Key takeaways
- Martijn Rats said flows through the Strait of Hormuz are down to about 2 to 3 million barrels a day, roughly 80% to 90% below normal.
- Diesel, not Brent crude, is where the tightness is showing most clearly, with the ICE gas oil benchmark around $1,200 to $1,240 a ton.
- Rats said diesel demand destruction likely begins near $1,400 a ton, implying the market may still have about 5% to 10% more upside before hitting that threshold.
- He said roughly 60% of the Russian refining system is out, pushing gasoline and diesel exports sharply lower.
- Rats thinks the market’s hidden inventories may be much larger than expected, but if disruptions last into August and September, the system could run on fumes.
Notable quotes
“if this lasts another sort of month or two three then it's hard to hard to argue that by then the buffers in the system will not have been completely exhausted”
“the price that destroys diesel demand is probably in the order of $1,400 a ton”
“we are getting close. There is probably a little bit more to go like another 5% 10% that sort of thing before you really hit some exceptionally high levels”
“the system has been behaving as this the unobservable part of the inventories are way larger”
How the episode opens
Welcome to Thoughts on the Market. I'm Andrew Sheets, global head of fixed income research at Morgan Stanley. And I'm Marta Ratz, head of commodity research at Morgan Stanley.
Today, talking about the recent volatility and the direction ahead for oil. It's Wednesday, July 29th at 2 p.m. in London.
Martin, it's great to talk to you again. We haven't talked for a little while on this program, but oil is once again back in the headlines and it's moving around. So maybe to just jump right into things as you look at the lay of the land in global energy markets at the moment.
What's been happening? What are you telling clients?
Okay. Well, we've had a large amount of volatility over the last couple of weeks. Um, if you roll the clock back sort of to the beginning of June, in the beginning of June, it started to become clear that already some more oil was leaking out of the straight arm and perhaps many of us anticipated at the time, but that data has been confirmed since then.
And then of course in the middle of June, we got the memorandum of understanding. And after that, roughly 150 million barrels a day or so that was behind the straighter moose got cleared. And
These were tankers that were stuck there during the conflict. All came out.
Absolutely. Laden tankers that were there that had just basically turned into floating storage for a good couple of months. They all cleared out and that actually created a bit of a glut in the sense that all of a sudden the refiners of this world had a lot of crude to absorb and we saw many indication of physical looseness in the market.
physical differentials, calendar spreads, all sorts of indicators pointed that physically there was a lot of oil temporarily to be absorbed and and the spot price of brand fell to 70 bucks
And that looked to be the new direction of travel.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- oil market
- energy market
- commodity research
- middle east tensions
- oil supply runway
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “The Oil Market’s Billion-Barrel Problem” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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