It has been 35 days since SoH (Strait of Hormuz) has been closed. In the last 24 hours, only 5% of 60 day normal i.e. 7 ships were able to cross SoH. We decided to look at countries who are likely to face maximum pain in terms of crude & crude products. As inventories near critical thresholds, prices—not stocks—become the primary balancing mechanism. The effective loss of 14 mbd from the closure of Hormuz is so large that the market’s immediate adjustment mechanisms narrow to just two: inventory draws and demand destruction. For e.g. by May OECD inventory drawdown of 233mb might force it to reach levels of operational minimum after which demand destruction is inevitable. We also looked at various scenarios in which SoH can open up and how soon can the crude supplies be normalised. No easy answer but assuming a full opening of SoH, it might take 4 months minimum for OPEC supply to recover to 31mbpd still lower than pre war level of 33 mbpd. There are various factors at play such as shipping companies testing water initially, insurance firms lowering insurance charges & above all safe passage. But in the above case we are assuming: (a) all diversions away from the Strait are used and (b) Iran lets ships of “friendly importers” to pass the Strait, as reported in various media outlets. We are assuming that except US & Israel, Iran might let all other nation ships pass through SoH. But what if Iran also decides to stop ships affiliated to middle east countries from where US is currently attacking Iran. In such a snecario even after 4 months, there will be a permanent loss of 4-5 mbpd of crude & crude products. So while financial paper prices might react in a kneejerk manner and bring Brent to $85 levels, it might not sustain there as OECD inventories get refilled & Asian countries increase their emergency reserves. Hence, we see the new normal for Brent as $90-100 for REMCY26.
