AI Summary
5 min readThe Strait of Hormuz carries 20 million barrels of oil per day — a third of all seaborne oil. The largest disruption in oil market history, the 1956 Suez crisis, took away about 10 percent of global consumption. This is easily double that. As Andrew Sheets and Martin Ratz explain on Thoughts on the Market, the oil market is facing a disruption of an order it has never seen before, and the available workarounds fall far short of what would be needed to balance it.
The Scale of the Disruption
Global oil consumption runs just over 100 million barrels per day, but the market that matters for pricing is the seaborne market of about 60 million barrels per day. The Strait of Hormuz flows 20 million barrels per day through it — 15 million of crude and 5 million of refined products. To understand how extraordinary that number is, Ratz offers a benchmark: in normal times, oil analysts get interested in supply-demand imbalances of a few hundred thousand barrels per day. When that imbalance reaches 2 to 3 million barrels per day, you get historically large market moves. In 2008-2009, oil fell from over $100 to around $30 because the market was 2 to 2.5 million barrels per day oversupplied for two quarters. In 2022, the mere expectation that Russia would lose about 3 million barrels per day of supply sent Brent to $130. "Now we're talking about 20," Ratz says. "If this is a market w
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What you'll learn
- 1 (00:00) **Introduction: The Strait of Hormuz and Oil Market Volatility** - Andrew Sheets and Martin Ratz introduce the topic: why investors are tracking ships through the Strait of Hormuz amid renewed US-Iran conflict.
- 2 (00:43) **Setting the Stage: Global Oil Market Size and the Strait's Role** - Martin explains the scale of the global oil market and the Strait's critical position.
- 3 (01:55) **Sensitivity to Disruptions: How Small is "Small"?** - Martin describes how the oil market normally reacts to supply-demand imbalances.
- 4 (03:40) **Historical Context: Unprecedented Scale** - Martin compares the potential 20 mb/d supply loss to past disruptions.
- 5 (04:34) **Can the Market Solve This? The Workaround Puzzle** - Martin explains why the market cannot easily offset a 20 mb/d supply loss.
- 6 (06:55) **Strategic Petroleum Reserve (SPR) and the Remaining Gap** - Martin assesses the IEA's proposed 400 million barrel SPR release.
- 7 (07:52) **The Price Mechanism: Demand Destruction at Extreme Levels** - Martin explains how price would need to rise to rebalance the market.
+ Full timestamped outline available in the app
Show Notes
Our analysts Andrew Sheets and Martijn Rats discuss why a prolonged disruption of oil flow through the Strait of Hormuz would be unprecedented—and nearly impossible for the market to absorb.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Martijn Rats: I'm Martijn Rats, Head of Commodity Research at Morgan Stanley.
Andrew Sheets: Today on the program we're going to talk about why investors everywhere are tracking ships through the Strait of Hormuz.
It's Wednesday, March 11th at 2pm in London.
Andrew Sheets: Martijn, the oil market, which is often volatile, has been historically volatile over the last couple of weeks following renewed military conflict between the United States and Iran.
Now, there are a lot of different angles to this, but the oil market is really at the center of the market's focus on this conflict. And so, I think before we get into the specifics, I think it's helpful to set some context. How big is the global oil market and where does the Persian Gulf, the Strait of Hormuz fit within that global picture?
Martijn Rats: Yeah, so the global oil consumption is a little bit more than a 100 million barrels a day. But that splits in two parts. There is a pipeline market and there is a seaborne market. And when it comes to prices, the seaborne market is really where it's at. If you're sitting in China, you're buying oil from the Middle East, all of a sudden, it's not available. Sure, if there is a pipeline that goes from Canada into the United States, that doesn't really help you all that much.
Andrew Sheets: So, it's the oil on the ships that really matters.
Martijn Rats: It's the oil on ships that is the flexible part of the market that we can redirect to where the oil is needed. And that is also the market where prices are formed. The seaborne market is in the order of 60 million barrels a day. So, only a subset of the 100 [million]. Now relative to that 60 million barrel a day, the Strait of Hormuz flows about 20 [million]. So, the Strait of Hormuz is responsible for about a third of seaborne supply, which is, of course, very large and therefore, you know, very critical to the system.
Andrew Sheets: And I think an important thing we should also discuss here, which we were just discussing earlier today on another call, is – this is a market that could be quite sensitive to actually quite small disruptions in oil. So, can you give just some sense of sensitivity? I mean, in normal times, what sort of disruptions, in terms of barrels of oil, kind
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