Oil Market Faces Tightening Deadline in Hormuz Crisis
Oil Market in "Race Against Time" as Strait of Hormuz Closure Looms
The oil market is facing a critical juncture as the factors that have tempered price rises from the Iran war may no longer hold if the Strait of Hormuz stays closed into June, according to a recent analysis by Morgan Stanley. Despite the loss of nearly 1 billion barrels of supply, futures have failed to surpass levels seen in 2022 as the market entered the crisis with buffers, and investors remained optimistic that the strait would reopen.
The analysts, led by Martijn Rats, noted that higher crude exports from the US, coupled with slowing imports from China, helped to shield the market from the shock of the war. However, a closure longer than what China or the US can sustain "could cause renewed tightness," the analysts warned. While China appears well-placed at present, the ability of the US to continue this elevated level of exports is under more pressure.
Since the outbreak of the war in late February, crude has rallied sharply, with Hormuz closed to almost all traffic given a double blockade by Iran and the US. However, futures have failed to top peaks following Russia's invasion of Ukraine. Morgan Stanley's base-case expectation is for Hormuz to open before the US needs to curtail exports and China needs to halt its decline in imports. If the interruption persists, higher prices may be likely.
| Market Scenario | Expected Price (Brent) |
|---|---|
| Base case (Hormuz opens in June) | $110 (Q2), $100 (Q3), $90 (Q4) |
| Bull case (longer closure) | $130-$150 |
In the bank's base case, Dated Brent, a physical marker, is seen at $110 a barrel this quarter, $100 in the following three months, and $90 between October and December, with forecasts unchanged. In the bull case, based on a longer closure, prices are seen at $130 to $150. The analysts noted that the United States' 3.8 million barrel-a-day increase in exports and China's 5.5 million barrel-a-day cut in imports have shielded the rest of the world from 9.3 million barrel-a-day of tightness, a very significant amount.
Investor Takeaway
Investors should be prepared for potential price rises if the Strait of Hormuz stays closed into June.
More in Market
SpaceX Seeks Record $75 Billion IPO, Potentially Positioning Elon Musk as the World's First Trillionaire
Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data
US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline
