Buffer stocks are about to run out! Morgan Stanley: The crude oil market is entering a real supply disruption phase, several times larger than in 2022.
The "effective blockade" of the Strait of Hormuz has entered the fourth week, and the buffer in the crude oil market is being rapidly depleted.
According to Wind Trading Desk, Morgan Stanley stated in its March 30 report that the intensity of the shock to Middle Eastern crude oil supply has already exceeded the loss from Russian supplies in 2022 by several times, and the most troublesome issue is not crude oil itself but refined products—jet fuel, diesel, and naphtha markets are entering a stage of substantial supply shortages.
Meanwhile, the supply shock is accelerating westward. Asian buyers are frantically snapping up Atlantic Basin supplies, pushing Europe to the very end of the replenishment competition. For investors, Brent crude's upside risks remain clearly present, and the quarterly average price forecast is by no means the cap for spot prices.
Four-week Snapshot: Transit Tankers Down 90%, Cumulative Losses Already Several Times the Russia-Ukraine Crisis
The "effective blockade" of the Strait of Hormuz has lasted four weeks, and the situation is far more severe than initially expected.
Currently, only 2 to 3 crude and refined product tankers pass through the Strait daily, compared to 30 to 40 per day before the blockade, a drop of as much as 90%.
Morgan Stanley statistics show that approximately 10.2 million barrels per day (mb/d) of crude production in the Middle East has been forced to shut down, an additional 1.2 mb/d of natural gas liquids (NGL) supply has been interrupted, and about 2 mb/d of refining capacity has stopped. Due to a shortage of crude feedstock, Asia has passively reduced an additional 2 to 2.5 mb/d of refining capacity.
In terms of cumulative losses, since the outbreak of the conflict, about 300 million barrels of crude oil, 30 million barrels of naphtha, 25 million barrels of middle distillates, and 9 million barrels of fuel oil have been lost in the market. Morgan Stanley clearly pointed out that the scale of this supply interruption is already several times that of the losses from Russia supply fears in 2022.
Buffer Nearly Exhausted, Initial "Calm" of the Market Is an Illusion
Facing such a significant shock, why weren’t oil prices’ initial reactions more dramatic?
Morgan Stanley cites Rystad Energy’s judgment: The market is not underreacting, but had ample buffers at the onset of the shock.
Before the crisis, the global crude oil market had about 2 mb/d of surplus production, sufficient onshore and offshore inventories, and certain spare capacity (mostly concentrated in the Gulf region). Additionally, cargoes in transit provided extra buffering, so the initial reaction appeared "calm."
However, these buffers are being rapidly consumed.
Morgan Stanley estimates the crisis has accumulated losses of about 400 million barrels in total supply. The IEA's coordinated release of strategic reserves (SPR) theoretically can release 1.3 mb/d, but even this is only the largest single coordinated release in history and could last just one month—far less than the actual supply loss rate caused by the Hormuz blockade.
Geographical mismatch is also a core issue: IEA reserve releases mainly benefit member countries, while the worst-hit are non-IEA Asian nations—India relies on Russian floating crude, but its remaining buffer is already very limited.
Refined Products Are Harder Than Crude: Jet Fuel, Diesel, Naphtha Running Short First
Morgan Stanley warns that the crisis in refined products markets has surpassed that of crude oil itself.
Calculations show that global refinery throughput cuts will average about 4.5 mb/d in March-April, with a shortfall of about 2.5 mb/d in May, and nearly all pressure borne by regions east of Suez. If Hormuz remains severely blocked by the end of April, global clean product supply losses could approach 250 million barrels, total product losses could exceed 350 million barrels, and cannot be fully replenished before 2027.
For specific products, jet fuel and diesel are the main pressure points.
Europe’s jet fuel issue has not been resolved, only delayed—the pre-blockade cargoes only provide temporary surface stability. Once those in-transit cargoes are depleted, substantive supply tightening will soon arrive. Even if European refineries fully increase output and adjust production structures, incremental jet fuel production is far from sufficient to replace those previously imported from east of Suez.
Naphtha is another stress point the market has underestimated.
Even with steam cracker demand sharply cut, Asia still faces a marked supply gap in April. Occasional cargo flows should not be misinterpreted as a sign of market normalization.
Impact Spreads West: From "Buffer Pool" to "Last Drop" in the Atlantic Basin
The most significant structural change in the market last week was the shortage east of Suez being "exported" to Brent-linked markets. Asian buyers are snapping up Atlantic Basin alternative supplies with unprecedented strength, squeezing Europe into last place in the supply competition.
Price signals are already clear: Dated Brent closed last Friday at $120.5/barrel, Brent DFL (spot premium) rose to a historic high of $10.31/barrel, and Brent near-month futures spread widened to $7.25/barrel.
The disorder in the tanker market is equally striking.
Currently, 33 VLCCs (Very Large Crude Carriers) are waiting at Yanbu anchorage, another 18 empty VLCCs are heading to the Red Sea, and at least 60 empty VLCCs east of Suez have signaled they are bound for Atlantic destinations.
Meanwhile, Asian buyers are even using Panamax and Suezmax ships through the Panama Canal to accelerate cargo arrival times—this is not an optimization plan but an emergency response, directly reflecting the severity of the spot shortage.
Reopening ≠ Normalization: Iraq Production Recovery Faces Real Bottleneck
Morgan Stanley especially cautions: the market tends to believe most suppressed Gulf production is "delayed" rather than "lost," but this is only partly true. The longer the downtime, the higher the risk that “delayed output” turns into “permanent capacity loss.”
Iraq is the most typical case. After reopening Hormuz, the country may not quickly restore about 1 mb/d of pre-war production. The Rumaila oilfield is the weakest link: prolonged shutdowns cause reservoir pressure loss, risks of flowing well shutdown, increased water cut in ESP wells, meaning well servicing is required; recovery will be slower than expected.
Additionally, southern Iraq’s storage tanks have long been near saturation; some fields cannot restart directly without first reducing inventories. More importantly, Al Basra Oil Terminal’s capacity is below normal historical levels, and the fragility of its underwater pipelines and other supporting infrastructure has been documented—hasty restart means large volumes pass under high pressure through aging pipe networks, with leakage and shutdown risks not to be ignored.
If Iran Retains Control, Oil Market May Forever Change the Game
Morgan Stanley believes that if the conflict ends with Iran retaining durable control over Hormuz, the global oil market will find it hard to return to pre-crisis equilibrium.
Morgan Stanley summarizes four structural impacts:
First, average exports will remain below pre-crisis levels.
As long as transit uncertainties linger, commercial buyers, ship owners, and insurers will price this risk into the entire supply chain, resulting in fewer sailings, slower flow recovery, and higher operational inventory needs.
Second, the actual value of OPEC’s spare capacity will be greatly discounted.
Capacity locked behind Hormuz is not the same as capacity readily available to market. A world with ample nominal spare capacity but unreliable transit is essentially no different from one with low spare capacity; average long-term oil prices will be supported.
Third, strategic stockpiling demands will systematically increase.
Once importers realize that roughly 20% of global oil supply and 30% of seaborne crude trade can be controlled by a single political actor, the motivation to build and expand reserves will surge, and this stockpiling demand is effectively equivalent to end-user demand—tightening the market and pushing up safety premia.
Fourth, structural premiums for non-Hormuz crude will persist long-term.
This premium is already evident in Atlantic Basin light sweet and medium sour crude. If this scenario continues, Brent-linked and other non-Hormuz crudes will enjoy higher structural premiums compared to pre-crisis.
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