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- [00:01]
A
Welcome to Thoughts on the Market. I'm Andrew Sheats, global head of fixed income research at Morgan Stanley.
- [00:07]
B
I'm Martin Rantz, head of Commodity research at Morgan Stanley.
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A
Today, oil, oil inventories and the price at the pump. It's Wednesday, May 6th at 2pm in London. Martin, it's great to talk to you. We remain in this very unique market where on the one hand the energy market is severely disrupted. On the other hand we're making new all time highs in the stock market. And part of this debate is a creeping sense that maybe the energy market is just a lot more resilient than many people initially thought. So let's just jump right into it. As you look at the current state of the world, the state of things, how are you seeing the energy market at the moment?
- [00:48]
B
There are definitely two views in the market. I would say commodity specialists, oil traders, people that trade oil and gas equities for a living, tend to focus on the size of the supply shock. And it is neither hyperbole nor disputed that the size of this supply shock is the largest in the history of the oil market. We have the statistical data to back that up. That is not a controversial statement. But at the same time the other view in the market generally held by generalist investors who invest across many markets, they tend to focus on the likelihood, possibility that this supply shock might also be uniquely short. It was there all of a sudden from one day to the next the strait was closed. It felt a bit man made, so to say it was the outcome of a political decision. And that can also be undecided. And so this is the towing and froing in the market is on the one hand this shock is very, very large, but the other end it may also be very, very short. Now we went into this supply shock arguably well prepared in the sense that during the course of like late 24, all of 2025, the very early part of 2026, we were telling a story of oversupply surplus. And on top of that, given the military buildup was going on in January and February, a lot of countries in the Arabian Gulf, Saudi Arabia, the uae, Kuwait, visibly put out a lot of oil at sea. So in the oversupply of 2025, we put oil in storage in lots of places that we can't always see, but that seems very likely. Oil in the water was very, very high. So we have been living off these buffers and that has helped. And then yeah, at any point in time there were good enough reasons to assume that on a time frame of A couple of weeks, this would largely be resolved. We, we would eat into these buffers, draw some inventory. And it has been hard for the market then to really capitalize the size of the supply shock and say, yeah, really, oil prices need to spike very, very high. And in that sense we're left with this significant supply shock. But we haven't taken out the highs that we saw in 2022, for example.
- [03:06]
A
So maybe a way to think about this is that if we imagined all of that oil as sitting in a big tank, you know, there's. We've kind of stopped a lot of the flow into the top of the tank as the Strait of Hormuz has remained closed, but oil is still able to drain out of the bottom kind of like normal because that tank is being drained. Those inventories have been drawn down. Maybe that's a quite a crude analogy, to forgive the pun, but how long can that last? I mean, if we think about these inventories, if we think about the speed at which they're being drawn down, and I think that's an important point that you mentioned, that these inventories were unusually high going in, but they're obviously unlimited. Where does that stand? And I guess, what is the limit of that? How long can those inventory draws last?
- [03:54]
B
Yeah. To say that this is the billion dollar question would be understating it, Andrew. It's also a usually complicated question to answer in the sense that it depends very heavily on the region, on the product that you're looking at. Jet fuel in Europe, NAFTA in Asia, you might see something sooner, but other products in other regions might take longer. We often don't really know where the operational limitations of inventories are. Globally, we see something like 8 billion barrels of oil in some form of storage. That is an enormous amount. We can't draw that down to zero because a lot of that is there for operational, like working capital type reasons. Just to facilitate the operations of the industry. Is the floor 7, is the floor 6. These things are hard to answer.
- [04:37]
A
You've got to have some oil in the pipeline to make the pipeline flow.
- [04:40]
B
Exactly, exactly. You can't operate a refinery if you don't have at least some storage right next to it. It just doesn't work. So these things are hard to know. But I would say that we are eating through these buffers very, very rapidly now. Oil and water has largely normalized and is no longer elevated. We are seeing very large inventory draws across every data point that we have on refined products. Refined products are universally drawing on crude. The data is more patchy. But we are seeing large inventory draws now coming through in the United States, I would say, and this is partly having worked with this data for a long time and sort of developing some market feel rather than very analytical spreadsheets, so to say. But I would say that if the flow of oil through the Strait of does not resume on the sort of next four to six weeks, we will get very, very tight by June, early summer. And look, I mean from there, if you then were to forecast project forward from there on, it would be getting tight by August, September. But of course that's under the assumption that the flow remains impaired over that period, which I would say most market participants would not assume at the moment.
- [05:52]
A
And another point that comes up sometimes, at least in my conversations, is oh, but maybe Venezuelan oil is going to be coming online. There's more investment. The US seems very focused on incre oil output in Venezuela. Can that match in any sense the scale of what we've had disrupted here?
- [06:09]
B
No, that is a complicated issue in the sense that growing oil production takes time. It takes capital, it takes equipment, takes all people. Venezuela at the moment produces a bit more than a million barrels a day, I'd have to say relative to the size of Venezuela's production. The last two monthly data points have actually come in better than expected. But you're Talking about oil 100,000 barrels a day, 200,000 barrels a day, that sort of thing. Relative to a supply shock that is 13, 14 million barrels a day. The fastest ever single amount of production growth of any country in Any year was 2018. U.S. shale, with natural gas liquids included grew 2 million barrels a day in a single year.
- [06:50]
A
But yeah, Even though, so 2 million barrels relative to 14 million barrels lost is exactly drop in the bucket.
- [06:57]
B
And that had a huge run up of several years of putting the infrastructure in place to do that. You don't turn down on a dime either. So no, that remains difficult.
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A
So maybe a dynamic to close with is actually another way that I think people care about the oil price besides their portfolio, which is they drive. And you had a great stat in your report that 1 out of every 11 barrels of oil that's produced ends up in an American car. And the US is a big producer. Its inventories have been drawing down. There are clear signs that the US is exporting a lot of energy and as a result, gas prices are also going up in the U.S. so, you know, one, if you could just talk a little bit about the move in gasoline and maybe, you know, I think this could be a good segue into this idea of distillates into kind of parts of refined product and how those prices can deviate or not from the barrel of oil we often talk about. And then even just more generally, kind of what is the price at the pump that people might need to think about as you head into the summer, assuming this conflict is still somewhat uncertain.
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B
Yeah. So the United States. Very interesting at the moment in the sense that the regular discourse about the United States is the United States is energy independent because it is a net oil producer. And at the most aggregate level, that is correct. But that doesn't mean that the United States is not connected to the rest of the world. From an oil market perspective, I would say actually it's the opposite. The US Oil market is deeply connected to the rest of the world. It is a net exporter because there are very large imports and there are very large exports. And it just happens so that the exports are a little bit bigger than the imports. So it's a net exporter. But flows in both directions exist for every product for crude, for diesel, for gasoline. So the US should be the last place to have physical disruptions because the supply is close to home. But in the end, it's so connected. In the end, there's only one global oil price and we all pay it, including in the United States. Now, because of the deficits at the moment in Asia, to extent in Europe, there is a very large pool on oil from the United States, and we're seeing that across the board. Crude oil exports were 4 million barrels a day at the start of the year. They're now running sort of five and a half, even six million barrels a day. So there's a lot of crude oil being pulled out. The United States, that is partly also the SPR release, the release from the Strategic Petroleum Reserve, but the exports, very, very large. Another product where that is also happening is in gasoline. Now, the gasoline market in the United States has a degree of complexity to it in the sense that the US Is a big importer of gasoline in the east coast and the west coast, but then a big exporter from the Gulf Coast. Net, net, it's an exporter. But in the east coast and the west coast, big, big importer. Now, in Europe, for example, we are normally long gasoline, short diesel. We export our surplus to the US east coast, but at the moment it's tight in Europe, so we're not exporting that much gasoline. So imports in the United States have dropped a lot. At the same time, Asian customers, Brazilian customers, Mexican customers pulling a lot of gasoline out of the Gulf Coast. And as a result, the net exports are unusually high for this time of the year. On top of that, the Strait of Hormuz issue has tightened the diesel market so much relative to the gasoline market that it is favorable for refineries to maximize their diesel output over their gasoline output.
- [10:25]
A
And these are decisions you can make in terms of how you crack that barrel in a refinery and split it up?
- [10:31]
B
Yeah, exactly. Within a relatively narrow window. But you can make tweaks that are significant. Now, normally we're going into this summer driving season. Refineries switch from what we call max diesel to max gasoline. At the moment, they are not doing that. So you have low gasoline production and you have large net exports of gasoline. Over the last 11 weeks already, we have seen a very significant, very significant decline in gasoline inventories in the United States. And prices have risen at the pump. The nation's average is now $4.50 per barrel. As of reports this morning, the summer driving season has yet to start. That can become $4.7. 480. That can become $5. Above $5 is historically a point where people get worried about demand destruction and it has a real impact.
- [11:18]
A
Well, Martin, I think this remains such an important and interesting story. And even if it can seem sometimes like the market has moved on to other things, clearly there are a lot of other factors driving the equity market. It remains pretty historic, pretty significant and pretty complicated also something that I think affects the day to day spending and lives of a lot of people out there. So, Martin, again, thank you for taking the time to talk. Thank you and thank you as always for your time. If you find thoughts on the market useful, let us know by leaving a review wherever you listen and also tell a friend or colleague about us today.
- [11:58]
B
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