The oil market is in “a race against time” as the factors that combined to restrain price rises from the Iran war so far may no longer hold if the Strait of Hormuz stays closed into June, according to Morgan Stanley.
Despite the loss of almost 1 billion barrels of supply, futures have failed to top levels seen in 2022 as the market entered the crisis with buffers, and investors kept expecting the strait to reopen, analysts including Martijn Rats said in a note. In addition, higher crude exports from the US, coupled with slowing imports from China, helped to shield the market from the shock, they said.
Looking ahead, a closure longer than China or the US can sustain “could cause renewed tightness,” they said. While the Asian nation appears well-placed at present, “the ability of the US to continue this elevated level of exports is hard to gauge but appears under more pressure,” they said.
While crude has rallied sharply since the outbreak of the war in late February — with Hormuz closed to almost all traffic given a double blockade by Iran and the US — futures have failed to top peaks following Russia’s invasion of Ukraine. At present, 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, but if the interruption persists, higher prices may be likely.
“The path matters: a reopening in June with US and Chinese buffers still partly intact is the base case; a closure that runs into late June or even July is the regime in which Brent flat price has to do work it has so far been able to avoid,” they said, referring to futures for the global crude benchmark.
In the bank’s still-current 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 were seen at $130 to $150.
“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,” the analysts said in a section headlined “A race against time.”
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