Morgan Stanley says the global oil market may never return to its old equilibrium, even if geopolitical tensions cool.
In a new episode of the Thoughts on the Market podcast, Morgan Stanley head of commodity research Martijn Rats says he’s seeing a scenario where hostilities in the Middle East could ease but leave Iran with total control in oil shipments flowing through the Strait of Hormuz.
“What seems to be emerging is an outcome whereby this could de-escalate, but leave the Iranian regime structurally in control of the flow of oil through the Strait of Hormuz. And if the Iranian regime continues to manage the flow as they currently do, cargo by cargo, because there are some cargoes trickling out and there is a process that seems to be established for it, there seems to be a toll that seems to be paid, given that that will then manage 20% of global oil supply, that is not the same oil market that we had before.”
According to Rats, the change could force many countries to start building strategic oil reserves and refineries willing to pay a premium to get supplies from more secure sources, leading to higher-for-longer prices.
“First, a lot of the supply would be fundamentally less reliable. Second, we would have de minimis effective spare capacity in the system. Thirdly, if this is the scenario we are left with, it creates an enormous incentive for countries to start expanding their strategic storages and building strategic inventories, which is like
exerting demand…
In the West, we’ve historically had strategic storage, but India, for example, has none. And so the rest of Southeast Asia, no strategic storage. A lot of strategic storage buying that is price supportive.
And also, look, the prices that we care about are the price of Brent and WTI. And they are not behind the Strait of Hormuz. They have higher security of delivery. You can totally see how refineries would be willing to pay a premium for those crudes relative to others. So when you add all of that up, it leaves you with a higher risk premium that people would pay, particularly for the crudes that form our perceptions about the oil market.”
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