Morgan Stanley warns oil market in ‘race against time’ as Strait of Hormuz remains shut amid Iran war

The global oil market is now in “a race against time” as the factors that have so far limited the surge in crude prices following the Iran war may not hold if the Strait of Hormuz remains shut into June, Bloomberg reported, citing analysts at Morgan Stanley.

Despite the disruption of nearly 1 billion barrels of oil supply, crude futures have still not crossed the levels seen in 2022 after Russia’s invasion of Ukraine. Analysts led by Martijn Rats said the market entered the crisis with sufficient buffers, while investors continued to expect that the Strait of Hormuz would eventually reopen.

The brokerage also pointed to higher crude exports from the United States and weaker imports from China as two key factors that have helped cushion the global market from a deeper supply shock.

However, Morgan Stanley warned that a prolonged closure of Hormuz could begin to tighten markets again if it stretches beyond what either China or the United States can sustain.

According to the analysts, China currently appears relatively well-positioned to manage the disruption. But the ability of the United States to continue exporting crude at elevated levels is becoming harder to assess and appears to be under increasing pressure.

Crude prices have already rallied sharply since the conflict erupted in late February, with shipping traffic through the Strait of Hormuz severely disrupted because of a dual blockade by Iran and the United States. Even so, oil futures have remained below the peaks reached after the Russia-Ukraine war began.

Morgan Stanley’s base-case scenario still assumes that the Strait of Hormuz reopens before the United States is forced to cut exports and before China has to reverse its decline in imports. But the bank cautioned that if disruptions continue for longer, oil prices may have to rise further to rebalance the market.

“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,” the analysts said, referring to global benchmark crude futures.

Under Morgan Stanley’s current base-case forecast, Dated Brent, the physical crude benchmark, is expected to average $110 a barrel this quarter, $100 in the following three months and $90 between October and December.

In its bullish scenario, which assumes a longer disruption to Hormuz traffic, the bank sees oil prices rising to between $130 and $150 a barrel.

“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 titled “A race against time.”

On Monday, Brent crude futures climbed as much as 4.6% to $105.99 a barrel after U.S. President Donald Trump rejected Iran’s latest response to his proposal aimed at ending the conflict.

Trump is due to arrive in Beijing on Wednesday and is expected to discuss Iran, among other issues, with Chinese President Xi Jinping, Reuters reported, citing US officials.

Market attention now shifts squarely to President Trump’s visit to China this week. Experts say there is hope he can persuade Beijing to leverage its influence over Iran to push for a comprehensive ceasefire and a resolution to the ongoing disruption in the Strait of Hormuz.

Saudi Aramco CEO Amin Nasser said on Sunday that the world has lost about 1 billion barrels of oil supply over the past two months, adding that energy markets would take time to stabilise even if flows resume.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)