The Staggering Impact of the Strait of Hormuz Disruption

As the conflict in Iran enters its third week, the global energy market is grappling with an unprecedented supply shock. Martin Ratz, Morgan Stanley’s global commodity strategist, highlights that the shutdown of the Strait of Hormuz has effectively reduced daily oil tanker departures from the Gulf from 35 to near zero. This event represents a disruption of roughly 20% of global oil supply—a scale double that of the 1950s Suez Crisis.

The Failure of Systemic Buffers

Initially, the market attempted to adapt through "floating storage," with vessels inside the Gulf holding inventory to keep the supply chain moving. However, this buffer is now exhausted, with volumes surging to over 120 million barrels. Because storage is full, producers have been forced to "cut output," resulting in approximately 10 million barrels per day of upstream oil and gas production going "offline."

While potential offsets like pipelines, strategic reserve releases, and naval escorts exist, they fail to mitigate the crisis entirely. The market currently faces a net shortfall of 10 to 12 million barrels per day—more than triple the supply shock feared in 2022, when Brent prices hit $130 per barrel.

Refined Products and Economic Contagion

Beyond crude oil, the crisis has triggered "acute shortages" in refined products, which lack the flexibility of crude.

• Jet Fuel: Europe, which relies on imports for 37% of its jet fuel, is seeing a "sharp decline" in these critical flows.
• Petrochemical Feedstocks: Middle East exports of Naphtha to Asia have plummeted from 12 million barrels per day to "almost zero."
• Logistics: In hubs like Singapore, marine fuel prices have "surged dramatically," with some exceeding $250 per barrel.

As Ratz notes, once fuel shortages impact logistics, the disruption transcends the energy sector, hindering the "movement of goods across the economy."

Future Outlook: Reopening vs. Repairing

Morgan Stanley outlines two primary scenarios for the market:

1. The Reopening Scenario: Even if the strait reopens within one to two weeks, the system will not "snap back." An "air pocket"—a gap caused by empty inventories and disrupted supply chains—will likely keep oil prices elevated through the second and third quarters.
2. The Prolonged Closure: Should the disruption persist, the market will move from "substitution to rationing." Historically, rationing necessitates price levels between $130 and $150 per barrel to force a drop in demand.

Consequently, the firm has revised its base case forecast, expecting Brent oil prices to average $110 per barrel in the second quarter. Ratz emphasizes a critical distinction: "reopening the strait is not the same as repairing the system." This supply chain shock will require significant time to unwind, suggesting a long road to market stabilization.