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Welcome to Thoughts on the Market. I'm Martin Ratz, Morgan Stanley's global commodity strategist. Today, what's fueling the latest oil market rally? It's Thursday, February 26th at 3pm in London. What happens when oil prices jump even though there's no actual shortage of oil? That's the situation we're in right now. Tensions between the US And Iran have escalated again. Naturally, markets are paying attention. Over the past week, Brent Crude rose about $3 to around $72 a barrel. WTI climbed into the mid-60s. Shipping costs have surged and traders have started paying a premium for protection against a sudden oil price spike to levels we haven't seen since the early days of the Ukrainian invasion. But here's the key point. There's no clear evidence that global oil supply has tightened. Exports are still flowing, tankers are still moving, and some near term indicators of physical tightness have actually softened. When oil is truly scarce, buyers scramble for immediate barrels and short term prices spike relative to future delivery. Instead, those spreads have narrowed and physical premiums have eased. This isn't a supply shock, it is risk premium. In simple terms, investors are buying insurance. So what could happen next? We see four broad scenarios. Before I outline them though, here's something we do not see as a core case. A prolonged closure of the Strait of Hormuz, roughly 15 million barrels per day of crude oil and another 5 million barrels of refined product move through that corridor. A sustained shutdown would be enormously disruptive, but we think the probability is very low. Now, coming back to our four scenarios, the first is straightforward. A negotiated settlement. Conflict is avoided, Iranian exports continue and shipping lanes remain open. In that scenario, what unwinds is the geopolitical risk premium, which we estimate at roughly $7 to $9 per barrel. If that fades, Brent could drift back to the low to mid-60s, similar to past periods where prices spike on fair and then retrace once supply proves unaffected. Second, we could see short lived frictions. Shipping delays, higher insurance cost, temporary logistic issues that might remove a few hundred thousand barrels per day for, say, a few weeks. Prices could briefly spike into the 75 to $80 range, but balancing forces would kick in relatively quickly. For example, China has been building inventories at a steady pace at higher prices. That stock building would likely slow, helping offset temporary disruptions. That points to some further upside in prices, but then normalization. The third scenario is more serious, but still contained localized export losses of perhaps 1 to 1.5 million barrels per day for a month or two. Prices which stay elevated longer, but spare capacity and demand adjustment could eventually stabilize the market. Now our last scenario is the more serious and considers a potential shipping shock. The real risk here isn't wells shutting down, it is shipping disruption. Global trade of crude oil depends on efficient tanker movements. If transit times were extended, even modestly, effective shipping capacity could fall sharply, creating what amounts to a temporary tightening of about 2 to 3 million barrels per day of about 6% of global seaborne supply. That is a logistics shock, not a production outage, but it would be enough to push prices towards early 2022 type levels at least briefly. Now let's zoom out beyond geopolitics. The fundamentals look weak. OPEC supply is rising and our forecasts show a sizable surplus building in 2026. Even if some of that oil ends up in China's stockpiles, a lot would still likely flow into core OECD inventories. Historically, when the market has looked like this, prices tend to fall, not rise. Which brings us back to the central point. Oil isn't rallying because the world has run out of barrels. It's rallying because markets are pricing geopolitical risk and unless that risk turns into actual sustained disruption, insurance premium tend to expire. Thank you for listening. If you enjoyed the show, please leave us A review wherever you listen and share thoughts on the market with a friend or colleague today.
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