Buffer Is Running Out! Morgan Stanley: Oil Market Enters Substantial Supply Disruption Phase, Scale Multiples of 2022

The "effective blockade" of the Strait of Hormuz has entered its fourth week, and the oil market buffer is being rapidly depleted. According to Zhuifeng Trading Desk, Morgan Stanley stated in a report on March 30 that the intensity of the Middle East crude oil supply shock is already several times that of the Russian supply loss in 2022, and the most thorny problem is not crude oil, but refined products—the jet fuel, diesel, and naphtha markets are entering a phase of substantial supply shortage. At the same time, the supply shock is accelerating its transmission westward, as Asian buyers frantically snap up supplies from the Atlantic Basin, pushing Europe to the very end of the restocking competition. For investors, the upside risk for Brent crude remains clearly present, and quarterly average price forecasts are by no means the upper limit for spot prices. Four-Week Snapshot: Oil Tanker Transit Plummets 90%, Cumulative Losses Already Multiples of the Russia-Ukraine Crisis The "effective blockade" of the Strait of Hormuz has completed four weeks, and the situation is far more severe than initially expected. Currently, only 2 to 3 crude oil and refined product tankers pass through the strait daily, compared to 30 to 40 tankers per day before the blockade, a drop of up to 90%. Morgan Stanley estimates that approximately 10.2 million barrels per day (mb/d) of crude oil production in the Middle East is currently forced offline, along with 1.2 mb/d of natural gas liquids (NGL) supply disruption and 2 mb/d of refining capacity idled. Dragged down by the shortage of crude feedstock, an additional 2 to 2.5 mb/d of refining capacity in Asia has been passively reduced. In terms of cumulative losses, since the outbreak of the conflict, the market has lost approximately 300 million barrels of crude oil, 30 million barrels of naphtha, 25 million barrels of middle distillates, and 9 million barrels of fuel oil. Morgan Stanley clearly pointed out that the scale of this supply disruption is several times that of the Russian supply loss feared by the outside world in 2022. Buffer Is Nearing Depletion; The Market's Initial "Calm" Was an Illusion Given the scale of such a shock, why was the initial reaction of oil prices not violent enough? Morgan Stanley cited Rystad Energy's judgment: The market was not underreacting, but rather happened to have an ample buffer at the beginning of the shock. Before the crisis, the global crude oil market had about 2 mb/d of surplus production, sufficient onshore and offshore inventories, and a certain amount of spare capacity (although highly concentrated in the Gulf region). Coupled with cargoes in transit providing an additional buffer, the market's initial response appeared calm. However, these buffers are being rapidly consumed. Morgan Stanley estimates that this crisis has cumulatively resulted in a loss of about 400 million barrels of total supply. Theoretically, the IEA's coordinated release of Strategic Petroleum Reserves (SPR) could release 1.3 mb/d, but this is only the largest single coordinated release in history and can only last for one month, far below the actual supply disruption rate caused by the Hormuz blockade. Geographical mismatch is also a core issue: IEA reserve releases primarily benefit member countries, while the most deeply impacted are non-IEA member countries in Asia—India relies on floating Russian crude, but its remaining buffer is very limited. Refined Products More Difficult to Solve Than Crude: Jet Fuel, Diesel, and Naphtha Are the First to Face Emergencies Morgan Stanley warns that the severity of the crisis in the refined products market has surpassed that of crude oil itself. Calculations show that the reduction in global refinery utilization rates will average about 4.5 mb/d in March and April, with a gap of about 2.5 mb/d remaining in May, and almost all of the pressure is being borne by the region east of Suez. If the Strait of Hormuz remains severely obstructed until the end of April, global clean refined product supply losses will approach 250 million barrels, with total refined product losses exceeding 350 million barrels, and will not be fully replenished before 2027. In terms of specific varieties, jet fuel and diesel are the main centers of pressure. Europe's jet fuel problem has not been resolved but postponed—cargoes loaded before the blockade can only maintain a brief superficial stability; once the cargoes in transit are cleared, the substantial tightening of supply will officially arrive. Even if European refineries increase production to full capacity and adjust their output structure, the increase in jet fuel will be far from sufficient to replace the supply originally imported from east of Suez. Naphtha is another pressure point underestimated by the market. Even though steam crackers have significantly reduced demand, Asia still faces a clear supply gap in April, and the movement of sporadic cargoes should not be interpreted too early as a signal of market normalization. Shock Spreads Westward: Atlantic Basin Has Changed from a "Buffer Pool" to the "Last Drop" The most important structural change in the market over the past week is that the shortage east of Suez is being "exported" to the Brent-linked market. Asian buyers are snapping up alternative supplies from the Atlantic Basin with unprecedented intensity, while Europe is being squeezed to the very end of the supply competition. Price signals are already very clear: Dated Brent closed at $120.5/barrel last Friday, Brent DFL (spot premium) rose to its highest level in history at $10.31/barrel, and the Brent futures near-month spread widened to $7.25/barrel. The disorder in the tanker market is equally startling. Currently, 33 Very Large Crude Carriers (VLCCs) are waiting at anchor in Yanbu, another 18 empty VLCCs are heading to the Red Sea, and at least 60 empty VLCCs located east of Suez have signaled their intent to head to Atlantic destinations. Meanwhile, Asian buyers are even using Panamax and Suezmax vessels to reroute through the Panama Canal to advance the arrival time of cargoes—this is not an optimization plan but an emergency measure, directly reflecting the severity of the spot shortage. Reopening ≠ Normalization: Iraq's Capacity Recovery Faces Substantial Bottlenecks Morgan Stanley specifically noted: The market tends to think that most of the suppressed Gulf capacity is "delayed" rather than "lost"; this judgment only holds true to a certain extent. The longer the shutdown lasts, the higher the risk that some "delayed production" will convert into "permanent capacity loss." Iraq is the most typical case. After the reopening of Hormuz, the country may find it difficult to quickly restore its pre-war output of about 1 mb/d. The Rumaila oil field is the weakest link: reservoir pressure loss caused by continuous shutdown, the risk of self-flowing wells stopping production, and the rise in water cut in Electrical Submersible Pump (ESP) wells all mean that workover operations are required, and the pace of production recovery will be slower than expected. In addition, storage tank capacity in southern Iraq has been near saturation for a long time, and some oil fields cannot restart directly without first reducing inventory. More critically, the capacity of the Al Basra Oil Terminal is already lower than historical normal levels, and the fragility of its supporting infrastructure such as subsea pipelines is well-documented—a hasty restart means large amounts of fluid will pass through aging networks at high pressure, and the risks of leaks and shutdowns cannot be ignored. If Iran Retains Control of the Passage, the Oil Market Rules Could Be Permanently Changed Morgan Stanley believes that if the conflict ends with Iran retaining lasting control over Hormuz, the global oil market will struggle to return to the equilibrium before the crisis. Morgan Stanley outlined four structural impacts: First, average export volumes will continue to be lower than pre-crisis levels. As long as there is uncertainty in transit, commercial buyers, shipowners, and insurance companies will price this risk into the entire supply chain, resulting in fewer voyages, slower flow recovery, and higher operating inventory requirements. Second, the actual value of OPEC's spare capacity will be significantly diminished. Capacity locked behind Hormuz is not the same thing as capacity that can actually be supplied to the market. A world with ample nominal spare capacity but unreliable transit is essentially the same as a world with low spare capacity, and long-term average oil prices will be supported. Third, the demand for strategic reserve construction will systematically rise. Once importing countries realize that approximately 20% of the global oil supply and about 30% of seaborne crude oil trade can be controlled by a single political actor, the motivation to build and expand inventories will increase significantly. This reserve construction demand is equivalent to terminal consumption demand in terms of economic effect, which will continue to tighten the market and push up the prompt security premium. Fourth, a structural premium for non-Hormuz crude oil will exist for a long time. This premium has already been reflected in the Atlantic Basin light sweet and medium sour crudes. If this scenario continues, Brent-linked and other non-Hormuz crudes will enjoy a higher structural premium compared to before the crisis.