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Welcome to Thoughts on the Market. I'm Martin Ratz, Morgan Stanley's global commodity strategist. Today, how fast can Middle east production return? It is Thursday, June 4th at 3pm in London. Every time you pull into a gas station, those prices are staring back at you. What you see at the pump is just the front end of a global system we've been watching for months. Tankers, storage, insurance and shipping lanes all still constrained by the Strait of Hormuz. But while prices at the pump are still high, Brent has actually fallen back to around about $92 a barrel. In inflation adjusted terms, today's Brent price is actually right at the 50th percentile of the last 20 years, suggesting that the market is assuming a clean near term recovery in supply. You yet the disruption continues to be extraordinary. Roughly 11 million barrels per day of Gulf crude remains offline, close to half the region's pre conflict output. We think the market may be too optimistic. Our working assumption is now that meaningful export recovery through the Strait begins only in the second half of July. Even then, normal does not return with the flip of a switch. First, ships need to be willing to sail. Owners and insurers need confidence that the waterway is safe. If mines remain in traditional shipping lanes, the Strait can be technically open, but still operate at reduced capacity. Clearing that risk can take weeks and potentially several months. Second, the tanker fleet is in the wrong place. When ships cannot work in the Gulf, they move elsewhere. Bringing enough empty tankers back to lift crude takes time. Third, storage is a limiting factor. Oil fields cannot restart if export tanks are full. For producers that rely heavily on seaborne exports, empty tankers are therefore essential. Last, oil fields themselves need restarting. Before the closure, around 36,000 wells were active across six Gulf producers. Roughly 10,000 of those are currently offline. After a shut in of nearly five months, about 4 to 5,000 wells could face restart constraints. Reservoir pressure can decline, equipment can fail after sitting idle and flow lines need cleaning and safety checks. All told, around 75% of Los supply can probably come back within about four months or so after flows through the Strait of Hormuz regime. But the final 25% may take well into 2027. So why have prices not move more? The market began this shock with buffers. Inventories were elevated, oil and water was high and emergency relief releases helped. The US increased seaborne net exports of crude oil and refined products from roughly 5 million barrels a day to 9 million barrels a day. At the same time, China's seaborne net oil imports fell from about 13 million barrels a day a year ago to just over 7.5 million barrels a day over the last 30 days. But those cushions are thinning. Strategic reserve releases are scheduled to drop from about 2.5 million barrels per day in April through June to about 0.7 million barrels a day in July and August. US gasoline and diesel inventories are already well below five year seasonal lows. China is already on track for five consecutive months of unusually low crude buying for April through August delivery, but that starts to raise the probability that Chinese buyers return for September. Barrels buying for September typically starts mid to late June. Now oil is trading like the disruption is nearly over, but at the same time the physical system is telling a slower story. Prices may look calm on the screen, but the bottleneck is in tankers, storage tanks, wells and crews. Our brent forecast remains $110 per barrel for the second quarter and about $100 a barrel for the third quarter. We recently raised our estimates for the fourth quarter to 95 and the first quarter of 2027 to $85 a barrel and eventually expect a return to $80 per barrel eventually thereafter. Thanks 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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