Crossing the critical point: Price hikes are just the prelude, and the oil market will face "physical supply disruptions"

Title: (WCTW) The Oil Market Breaking Point Is Here

Author: HFI Research

Translation by: Peggy, BlockBeats

Editor’s note: This article argues that the global oil market has already crossed a “breaking point.” Going forward, the question is no longer whether oil prices will continue to rise, but rather how the supply shortfall in the real world will be passively revealed—whether through a rapid acceleration in crude oil inventory declines, shortages of refined products, or through policy measures that suppress demand.

The article’s core logic is built on a variable that the market has underestimated: a time mismatch. Even if the Strait of Hormuz reopens in the short term, the turnaround delays for tankers caused by earlier transport disruptions will continue to erode onshore inventories over the coming weeks. This means that supply problems will not ease immediately with the “reopening,” but will instead be reflected with a lag in inventories and the spot market.

Against this backdrop, refinery behavior becomes a key amplifier. The reduced run rates at refineries in Asia and Europe do not mean that terminal demand is weakening in sync; instead, they will first compress refined product inventories, raise product prices, and then force refineries to restart operations—forming a self-reinforcing cycle: high oil prices → profit compression → inventory depletion → profit recovery → higher utilization. This mechanism makes it difficult for the market to rebalance in the short term through conventional supply-and-demand adjustments.

An even more impactful judgment is that once the Strait remains closed through after April, the traditional oil price-setting framework will fail. What the market faces will no longer be cyclical price increases, but rather an extreme scenario approaching “physical shortage”—in that state, prices will no longer serve as an effective adjustment tool, and the oil price ceiling will lose its reference value. What can truly bring the market back to balance is not supply recovery, but something like the “policy-driven demand suppression” seen during the pandemic.

Therefore, $95 per barrel is far from enough to restore balance to the oil market. Given that geopolitical conflicts continue to intensify, what is worth paying closer attention to in the future is not oil prices themselves, but rather inventory changes, policy signals, and the pace at which demand passively contracts.

Below is the original text:

Please read the article “The Breaking Point of the Oil Market.”

Related: “Oil Prices Are Approaching the Breaking Point—What Will Happen in Mid-April?”

In the report we published on March 25, we listed multiple scenarios and pointed out that the oil market’s breaking point would occur in mid-April. And now, that breaking point has already passed.

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

1. Crude oil inventories decline;

2. Refined product inventories decline;

3. Demand is disrupted.

If you’re not too familiar with the logistics mechanism or the logic behind it, let me walk you through it.

The so-called “breaking point” in the oil market corresponds to the last batch of crude oil shipped from the Persian Gulf to end users. Once these tankers complete unloading at port and cannot continue unloading afterward, they begin consuming onshore crude oil inventories. (For more details on how onshore inventory is calculated, refer to the earlier analytical articles.)

At present, the scale of global refinery shutdowns has already exceeded about 5 million barrels per day, with roughly 3 million barrels per day concentrated in the Middle East. Refineries in Asia and Europe are also reducing run rates, but refinery cutbacks do not mean that terminal demand has already fallen.

A decline in refinery run rates will accelerate the drawdown of refined product inventories, thereby pushing up refined product prices. This process, in turn, will raise refining profit margins, which will then stimulate refineries to increase run rates.

This cycle will repeat itself over the next few weeks: oil prices rise → refining margins are compressed → refined product supply decreases → refined product inventories decline → refining margins recover → utilization rates rise → oil prices rise further

In the spot market, this “game” will be played between traders who hold inventories and refineries that do not. Of course, this situation can only last until onshore crude oil inventories are exhausted, and that point is not far off.

By the first week of May, the only Asian countries that truly still have spare crude inventories will be Japan and China. Other countries will have to compete for spot crude oil in the market. If the Strait of Hormuz is still closed by then, you will see refineries obtain the crude oil they need at any cost—because the alternative is to shut down.

For Europe, crude oil shortages will also emerge within the same time window. At that time, US crude oil exports will be close to 5.5 million barrels per day, and crude inventories in OECD countries will fall to the minimum level required for operations, with remaining stocks mainly concentrated in the United States.

We expect that by the end of July, US commercial crude oil inventories will fall to below approximately 400 million barrels and approach the minimum level required for operations (about 370 million to 380 million barrels). This estimate also includes the release of about 139 million barrels from the Strategic Petroleum Reserve (SPR).

Over the coming period, the Donald Trump administration will likely have to impose restrictions on both crude oil and refined product exports at the same time. We believe the Trump administration will most likely restrict refined product exports first. If, due to compressed profit margins, US refineries begin to reduce utilization rates, then further restrictions on crude oil exports may follow—this would be an extremely bad scenario for US shale oil and for Canadian oil producers (we will expand on this in subsequent analysis).

It is important to emphasize that all of the changes above will occur whether the Strait of Hormuz reopens or not. Even if the United States reaches an agreement with Iran and restores unconditional transit through the Strait, the consumption of onshore crude oil inventories is still unavoidable.

Re-explaining the logic

Assume that by this Tuesday, the ceasefire ends and a long-term peace agreement is reached.

Currently, floating inventories on tankers are about 160 million barrels, and these crudes will begin unloading quickly. However, these tankers need 30 to 40 days to complete transportation and unloading; then their return voyage requires an additional roughly 20 days.

Meanwhile, about 70 very large crude carriers (VLCCs) are heading to the United States to load crude and ship it to Asia. Their loading cycle is about 6 to 8 weeks; it takes 45 to 50 days to reach Asia, plus 20 to 25 days for unloading and returning through the Strait of Hormuz. In other words, this fleet cannot form an effective return flow for at least the next 3 months.

To relieve the current backlog of onshore inventories in the Middle East, at least 100 VLCCs are needed to participate in transportation. Currently, onshore inventories are about 600 million barrels, but to restore production, inventories need to be reduced by at least about 200 million barrels. Based on available shipping capacity, this physical reduction will likely only be feasible by mid-to-late June.

Once onshore crude inventories are gradually released, stable tanker flows through the Strait of Hormuz will be needed for shipments. At that stage, oil-producing countries such as Saudi Arabia, the UAE, Kuwait, Qatar, Iraq, and Bahrain can gradually resume production. This process will take several weeks, which almost guarantees that the supply shortage will persist.

Based on our estimates in the March 25 “Breaking Point” report, the cumulative inventory loss caused by the Strait closure has already reached about 1 billion barrels; by the end of April, it will expand to 1.2 billion barrels; by the end of May, it will be 1.59 billion barrels; and by the end of June, it will be close to 1.98 billion barrels.

There are not enough commercial crude oil stocks in the market to fill a supply shortfall of that magnitude. Therefore, to avoid a systemic imbalance, the only adjustment available is “demand destruction.”

This is not a matter of judgment; it is just simple math.

Geopolitical considerations

I’ve never liked geopolitics—it is full of uncertainty, lacks a safety margin, is filled with gray areas, and rarely offers clear black-and-white boundaries. But regarding the Iran conflict, the situation seems to be moving toward an extreme “either-or” stance.

My friend PauloMacro recently recommended that I read Professor Robert Pape’s research. He is the author of “The Escalation Trap.” Over the past two months, I’ve systematically reviewed his related viewpoints. He recently published an article titled “Why the Ceasefire Keeps Failing,” which is worth reading.

From my personal observations, everything that happened this weekend almost looks like scenes taken straight from a horror movie.

Since the conflict erupted at the end of February, most tankers have chosen to hold position and wait in place. There was a view that the Strait of Hormuz was closed because insurance had failed. I agreed with that assessment in the early stage of the conflict, but as events unfolded—especially everything that happened this weekend—I was deeply shocked.

The Iran Islamic Revolutionary Guard Corps (IRGC) effectively carried out a blockade through the threat of force, directly threatening tankers with gunfire. We could see this clearly from tanker activity. Since we began tracking tanker movements, this is the first time we’ve seen such a large-scale collective turnaround. In the past, there were sometimes one or two tankers that changed course, but never on this scale—never like this weekend.

In my view, this sends two signals: first, the Iran Islamic Revolutionary Guard Corps has firmly taken control of the Strait of Hormuz; second, the conflict is likely to worsen further before it improves. Based on the conditions proposed by the IRGC and Iran, the United States is almost unable to accept them, leaving extremely limited room for maneuver. To fundamentally resolve this issue, it probably requires a “real solution”—and you know what I’m implying. I’m worried that the worst case has not arrived yet, and I’m saying this not to scare you, but because I genuinely believe it is true.

Oil market scenarios

In the previous article discussing the oil market’s “breaking point,” we pointed out that if the Strait of Hormuz could restore passage by the end of April, the price of Brent crude would “fall back” to around $110 per barrel; but today, it is trading at $95.

However, as I explained earlier, the oil market has already crossed the breaking point. Large-scale inventory drawdowns ahead will jolt the market completely. I suspect only when participants in financial markets see firsthand that a real crude shortage is truly happening will they realize that this supply disruption is not a mirage. Until then, most people cannot accept this reality.

The facts are exactly like that.

If the Strait of Hormuz does not reopen until after April, we will no longer be able to provide accurate oil price forecasts. Because by then, the market will have crossed a point of no return. This will become the largest supply disruption in the history of the oil market, roughly four times the scale of previous records. In such a scenario, traditional fundamental pricing theories will lose their meaning, because “absolute shortage” cannot be measured in terms of price. Once a market has no fuel available, it simply “shuts off.”

At what price will the last marginal barrel be traded? 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 will definitely come. For people who follow oil, what truly “kills” demand will be policy-level announcements. To balance daily supply disruptions of roughly 11 to 13 million barrels globally, there must be a demand drop on a scale comparable to pandemic lockdowns.

And even in such an extreme scenario, the market would only barely “balance,” not move into surplus. But at least it can ease the price shock. At that point, analysts like me—those focused on “a few barrels”—can judge when the real fundamental turning point occurs.

So, if we summarize in a few words: if the Strait of Hormuz remains closed after April, I don’t know how high oil prices will go, but it definitely won’t be $95 per barrel. Policy-driven demand destruction will rebalance the oil market, but only by preventing inventories from continuing to deteriorate downward.

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

Conclusion

The oil market’s breaking point has arrived. Global onshore crude oil inventories will drop sharply, and the speed of decline will be faster than anything seen before. US crude inventories are the last component to begin falling, and we will see this in next week’s US Energy Information Administration (EIA) inventory report. Once the market sees onshore inventories clearly declining, prices will quickly jump again.

If the Strait of Hormuz has not resumed normal passage by after the end of April, no one can tell you where the oil price top will be. By then, the market will have fully crossed that line. The only way to rebalance oil prices is through demand destruction. Therefore, rather than obsess over “how high prices will go,” it’s better to track those truly critical market signals.

But if this article only needs to leave you with one conclusion, it is this: the oil market will absolutely not rebalance at $95 per barrel. Oil prices must rise enough to offset daily supply disruptions of about 11 to 13 million barrels. Governments will have to implement forced demand compression policies similar to those in the pandemic period to suppress demand. Even so, it will only offset the supply shortfall, not push the oil market back into surplus. From a geopolitical perspective, I worry that the situation has entered a phase of “worsening before it improves,” because neither the United States nor Iran appears willing to concede.

Original link