Morgan Stanley strategist Martijn Rats cautions that continued disruption to oil and refined product flows through the Strait of Hormuz could push crude prices far higher, potentially moving "well above $130" per barrel if the interruption persists. Rats frames the situation as a sudden and large supply shock that could ultimately require steep price rises to reduce consumption and rebalance the market.
Rats points to the scale of the chokepoint: roughly 20 million barrels per day of crude and refined products typically transit the Strait. The abrupt stoppage of those flows, he argues, has created a supply deficit comparable in magnitude to the collapse in demand seen in the early months of the COVID-19 pandemic - but with the impact reversed. "This week, we are staring at a shock of comparable size, but with the sign flipped," he wrote, emphasizing that the world has suddenly become "short" a volume of oil that would normally dwarf most supply-demand imbalances.
The strategist says the effects are already emerging across the physical supply chain. Asian refiners, which depend heavily on crude moving through the Strait, are among the first to feel pressure. Some of those refiners have begun to cut back operations as incoming crude supplies tighten, Rats noted.
Refined product markets are showing strains as well. Rats highlights jet fuel in Singapore as a clear example, with prices jumping to around $200 per barrel from about $90 before the conflict began. Those moves in product markets reflect the narrowing availability of feedstock and finished fuels as flows remain impaired.
Risks are appearing upstream too. With exports constrained and storage capacity filling, producers may be forced to reduce output, Rats warned. He cited reports that operators in Iraq have announced curtailments as storage becomes tight, and that Kuwait has reduced refinery runs while product inventories build and export routes remain impaired. "The 'buffer' in the system is not infinite; it is a set of tanks with an end-date," Rats wrote.
According to the strategist, the critical variable for oil prices is not merely whether the conflict continues, but how much oil can flow through the Strait and for how long. He laid out a range of scenarios tied to the pace of recovery in flows.
In a relatively benign outcome where shipments resume quickly, Rats said the disruption could be temporary and Brent crude could remain in the $80 to $90 per barrel range before easing further as underlying supply conditions normalize.
By contrast, if flows only recover partially and the market remains short by several million barrels per day, he argues prices may have to rise to ration demand and rebalance markets. "In that world, $100/bbl is not a sensational forecast; it is a plausible mechanism for rationing and rebalancing," Rats wrote.
The most severe outcome, he added, would occur if disruptions endure for several weeks. At that point, the adjustment would shift from inventory management to demand destruction. "The market would begin searching for the price level required to materially reduce consumption - potentially well above $130/bbl - because the only remaining balancing tool is demand," Rats said.
Rats' note underscores how a chokepoint-driven interruption can transmit through refining operations, product markets, storage constraints and upstream production decisions, and how those dynamics shape the price path depending on how quickly flows are restored.
Clear summary
- Persistent disruptions through the Strait of Hormuz could create a supply shortfall on the order of 20 million barrels per day, prompting much higher oil prices to restore equilibrium.
- Immediate impacts are visible at Asian refiners and in refined product markets, with jet fuel in Singapore quoted around $200 per barrel versus about $90 before the conflict.
- If storage fills and exports remain impaired, producers may curtail output, and the market could move from inventory drawdown to demand destruction, requiring prices potentially well above $130 per barrel to restrain consumption.
Key points
- Scale of the shock - Roughly 20 million barrels per day normally pass through the Strait of Hormuz, and the sudden halt amounts to a major supply squeeze.
- Refining and product markets - Asian refiners are among the first to feel the effects, and jet fuel prices in Singapore have risen sharply.
- Upstream and storage impacts - Filling storage and constrained exports can force production curtailments, which amplify supply-side tightness.
Risks and uncertainties
- Duration of disruption - If flows remain impaired for weeks, the market could shift from inventory-driven adjustments to demand destruction, with large price increases as the balancing mechanism.
- Storage limits - Limited tank capacity means inventories cannot absorb ongoing shortfalls indefinitely; once storage reaches capacity, producers may need to cut output.
- Partial recovery scenarios - Even partial restoration of flows, leaving the market short by several million barrels per day, could still require significantly higher prices to ration demand and rebalance markets.
Disclosure
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