Not a Price Hike, but a Supply Shortage? Oil Price Has Crossed the Threshold

Original Title: (WCTW) The Oil Market Breaking Point Is Here
Original Author: HFI Research
Translation: Peggy, BlockBeats

Editor's Note: This article believes that the global oil market has crossed the "breaking point." The upcoming issue is no longer whether oil prices will continue to rise, but how the real-world supply gap will passively manifest—whether through accelerated crude oil inventory drawdown, refined product shortages, or demand suppression through policy measures.

The core logic of the article is built on a variable underestimated by the market: time dislocation. Even if the Hormuz Strait resumes passage in the short term, the oil tanker turnover delay caused by previous shipping interruptions will continue to erode onshore inventories over the coming weeks. This means that the supply issue will not immediately ease with "navigation restoration" but will instead lag and be reflected in inventories and the spot market.

In this context, refinery behavior becomes a key amplifier. The reduction in load from Asian and European refineries does not mean a simultaneous weakening of end-demand but rather will first compress refined product inventories, boost product prices, and then compel refineries to restart operations, forming a self-reinforcing cycle: high oil prices—profit compression—destocking—profit restoration—load increase. This mechanism makes it difficult for the market to rebalance in the short term through conventional supply-demand adjustments.

Even more impactful is the judgment that once the strait remains closed beyond April, the traditional oil price framework will fail. What the market will face is no longer periodic increases but an extreme scenario close to "physical shortage"—in this state, price is no longer an effective adjustment tool, and the price ceiling loses its reference meaning. What can truly bring the market back into balance is not supply recovery but something akin to "policy-driven demand suppression" as seen during the pandemic.

Therefore, $95 per barrel is far from enough to rebalance the oil market. In the context of escalating geopolitical conflicts, what deserves more attention in the future is not the oil price itself but inventory changes, policy signals, and the rhythm of passive demand contraction.

The original text is as follows:

Please read the article "The Breaking Point of the Oil Market".

Related reading: "Oil Prices Approaching a Breaking Point, What Will Happen in Mid-April?"

In our report released on March 25, we outlined various scenarios and pointed out that the oil market's breaking point would occur in mid-April. And now, this breaking point has passed.

From this moment on, the daily supply disruption of 11 to 13 million barrels will manifest in one of the following three forms:

1) Crude oil inventory decline;

2) Refined product inventory decline;

3) Demand destruction.

If you are not familiar with the logistics mechanism or logic behind this, let me explain it to you.

The so-called "chokepoint" in the oil market corresponds to the final batch of crude oil shipped from the Persian Gulf to end users. Once these oil tankers have completed unloading at the shore and cannot continue with further offloading, they will start drawing down onshore crude oil inventories. (For more details on onshore inventory calculations, please refer to the previous analytical articles.)

Currently, global refinery shut-ins exceed approximately 5 million barrels per day, with around 3 million barrels per day concentrated in the Middle East. Refineries in Asia and Europe are also reducing their run rates, but refinery cutbacks do not necessarily mean a decline in end demand.

The decrease in refinery run rates will accelerate the consumption of refined product inventories, thereby pushing up refined product prices. This process will, in turn, boost refining margins, stimulating refineries to increase their run rates.

This cycle will repeat itself over the next few weeks: crude oil price increase → squeezed refining margins → reduced refined product supply → depleted refined product inventories → recovery in refining margins → increased run rates → further rise in crude oil prices

In the spot market, this "game" will be played out between inventory-holding traders and refineries with no inventory. Of course, this situation can only last until onshore crude oil inventories are completely depleted, a point that is not far off now.

By the first week of May, the only Asian countries left with significant crude oil inventory will be Japan and China. Other countries will have to compete for spot crude oil in the market. If the Strait of Hormuz remains closed at that time, you will see refineries going to any lengths to obtain the necessary crude oil—because the alternative is shutdown.

For Europe, the crude oil shortage will also become evident within the same timeframe. By then, U.S. crude oil exports will be close to 5.5 million barrels per day, and OECD countries' crude oil inventories will have fallen to the minimum levels required for operations, with the remaining inventories mainly concentrated in the U.S.

We expect that by the end of July, U.S. commercial crude oil inventories will have dropped to around 400 million barrels or below, approaching operational minimum levels (around 370 to 380 million barrels). This estimate also includes the release of approximately 139 million barrels from the Strategic Petroleum Reserve (SPR).

In the coming period, the Donald Trump administration is likely to have to impose restrictions on both crude oil and oil product exports. We assess that the Trump administration will most probably first restrict oil product exports; if U.S. refineries start reducing their operating rates due to compressed profit margins, then further restrictions on crude oil exports might follow—creating an extremely dire situation for U.S. shale oil and Canadian oil producers (which we will elaborate on in subsequent analysis).

It is important to emphasize that all the aforementioned changes will take place regardless of whether the Strait of Hormuz reopens or not. Even if the U.S. reaches an agreement with Iran and unconditionally restores passage through the Hormuz Strait, the depletion of onshore crude oil inventories is still inevitable.

Reiterating the Logic

Assuming by this Tuesday, a ceasefire is reached and a long-term peace agreement is made.

Currently, there are approximately 160 million barrels of floating storage on oil tankers at sea, which will promptly start unloading. However, the transportation and unloading of these oil tankers will take 30 to 40 days, with an additional 20 days for the return journey.

At the same time, around 70 Very Large Crude Carriers (VLCCs) are en route to the U.S. to load crude oil for transport to Asia. The loading period for these tankers is approximately 6 to 8 weeks, with a 45 to 50-day journey to Asia, unloading, passing back through the Hormuz Strait, and returning taking an additional 20 to 25 days. In other words, for at least the next 3 months, this fleet will not be able to provide effective return capacity.

To alleviate the backlog of onshore inventories in the Middle East, at least 100 VLCCs need to be involved in transportation. Currently, onshore inventories are about 600 million barrels, and to allow oil-producing countries to resume production, inventories need to be reduced by about 200 million barrels. However, based on existing capacity, this is physically only possible by the mid to late June.

After the gradual release of onshore crude oil inventories, there needs to be a stable flow of oil tankers through the Hormuz Strait for shipment. At that stage, oil-producing countries like Saudi Arabia, the UAE, Kuwait, Qatar, Iraq, and Bahrain can gradually resume production. This process will take several weeks, which practically means that supply shortages will persist.

According to our estimates in the March 25 "Inflection Point" report, the cumulative inventory loss due to the strait closure has reached about 1 billion barrels; by the end of April, it will increase to 1.2 billion barrels, 1.59 billion barrels by the end of May, and close to 1.98 billion barrels by the end of June.

There is not enough commercial crude oil in the market to fill such a supply gap. Therefore, to prevent systemic imbalance, the only way to adjust is through "demand destruction."

This is not a judgment issue, but a simple math problem.

Geopolitical Issue

I have never been fond of geopolitics—it's full of uncertainties, lacks a safety margin, is rife with gray areas, and seldom has clear black-and-white boundaries. However, on the Iran conflict issue, the situation seems to be heading towards an "either-or" extreme.

My friend PauloMacro recently recommended me to read the research of Professor Robert Pape, the author of "Escalation Trap." Over the past two months, I have systematically read through his relevant viewpoints. He recently published an article titled "Why the Ceasefire Keeps Failing," which is worth a read.

From my personal observation, everything that happened this weekend seemed almost like a scene directly out of a horror movie.

Since the conflict erupted at the end of February, most oil tankers' choice has been to stand still, wait in place. Previously, there was a belief in the market that the closure of the Strait of Hormuz was due to insurance failures. I also agreed with this assessment early in the conflict, but as the situation developed, especially everything that happened this weekend, I was very shocked.

The Islamic Revolutionary Guard Corps (IRGC) of Iran actually implemented a blockade using threat of force, directly threatening oil tankers with open fire. We clearly saw this in tanker activities. This is the first time we have seen such a large-scale collective U-turn of oil tankers since we started tracking tanker movements. Occasionally, one or two oil tankers would change course in the past, but never on a scale like this weekend.

In my view, this sends two signals: first, the Iranian Revolutionary Guard Corps has firmly controlled the Strait of Hormuz; second, before the situation improves, the conflict is likely to escalate further. Judging from the conditions proposed by the IRGC and Iran, the U.S. is almost certain not to accept, so the room for maneuver in reality is extremely limited. To fundamentally resolve this issue, one might have to truly "resolve" it—you should understand what I'm implying. I fear the worst is yet to come, and I am not saying this as an alarmist.

Several Scenarios in the Oil Market

In the previous discussion on the oil market "tipping point," we pointed out that if the Strait of Hormuz could reopen by the end of April, the Brent crude oil price would "fall back" to $110 per barrel; today it is trading at $95.

But as I have explained earlier, the oil market has crossed the tipping point. The subsequent massive inventory depletion will completely awaken the market. I suspect that only when financial market participants witness the real-world occurrence of an actual oil shortage will they realize that this supply disruption is not an illusion. Before that, most people will not be able to accept this reality.

That's the fact.

If the Strait of Hormuz remains closed after April, we will no longer be able to provide an accurate oil price forecast. By then, the market will have crossed a point of no return. This will be the largest supply disruption in the history of the oil market, roughly four times the scale of any previous disruption. In this scenario, the traditional fundamental pricing theory will lose its meaning because an "absolute shortage" cannot be measured by price. Once a market runs out of fuel, it simply experiences a "supply cut-off."

What price will that last barrel of marginal crude oil trade at? I don't know, and I don't think anyone will be smart enough to know the answer.

But what I do know is that demand destruction is inevitable. For those focused on oil, the true "killer" of demand will be policy announcements. Balancing a supply disruption of approximately 11 to 13 million barrels per day globally will require a demand decline on a scale comparable to the lockdown period during the pandemic.

Even in such an extreme scenario, the market would only be "balanced" at best, not in surplus. But at least it would mitigate price shocks. At that point, analysts like me, the "barrel counters," will be able to assess when the real inflection point in fundamentals occurs.

So, if I were to summarize in a few sentences: If the Strait of Hormuz remains closed after April, I don't know where the oil price will spike to, but it surely won't be $95 per barrel. Policy-driven demand destruction will realign the oil market, but only enough to prevent inventories from further deteriorating.

We have already established a market signal system to monitor when this turning point arrives.

Conclusion

The tipping point of the oil market is here. Global onshore oil inventories will plummet rapidly, and the rate of decline will be unprecedented. The drop in U.S. crude inventories will be the final piece to start falling, and we will see this in the U.S. Energy Information Administration's (EIA) inventory report next week. Once the market visibly observes a significant onshore inventory drawdown, prices will quickly see a fresh upsurge.

If the Strait of Hormuz remains closed after late April, no one will be able to tell you where the oil price peak is. By then, the market will have completely crossed that line. The only way to rebalance oil prices is through demand destruction. So, instead of fixating on "how high oil prices will go," it is better to track those truly critical market signals.

But if this article could only leave you with one conclusion, it would be this: the oil market will never rebalance at $95 per barrel. Oil prices must rise enough to offset the 11 to 13 million barrels per day supply disruption. Governments will have to implement mandatory demand contraction policies similar to those during the pandemic to suppress demand. Even then, it will only offset the supply gap, not push the oil market back into oversupply. From a geopolitical perspective, I am concerned that the situation has entered a phase of "continuing to deteriorate before it gets better," as neither the U.S. nor Iran seem willing to back down.

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