Morgan Stanley: If the flow through the Strait of Hormuz remains blocked, oil prices could surge above $130.

Investing.com - Morgan Stanley strategist Martijn Rats said that if the flow disruption through the Strait of Hormuz persists, oil prices could surge to levels “far above $130 per barrel,” warning that the market may eventually need significantly higher prices to curb demand.

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Typically, about 20 million barrels of crude oil and refined products pass through the strait daily, and a sudden halt in flow has caused a supply shock comparable to the demand collapse early in the COVID-19 pandemic, Rats said.

In a report on Sunday, he wrote: “This week, we are facing a shock of similar magnitude, but with opposite signs,” emphasizing that the world’s sudden “shortage” of oil usually makes most supply-demand imbalances look insignificant.

This disruption has already manifested across the physical supply chain. Rats said that Asian refineries heavily dependent on crude oil from behind the Strait of Hormuz are the first to feel the pressure, with some slowing operations as supplies tighten.

Tensions are also beginning to show in the refined products market, with jet fuel prices in Singapore soaring from about $90 per barrel before the conflict to around $200.

Supply risks are also emerging upstream. The strategist said that if exports remain restricted and storage facilities fill up, producers may be forced to cut output. As storage capacity tightens, operators in Iraq have announced production cuts, and reports indicate that Kuwait has reduced refinery operations due to rising refined product inventories and still-damaged export routes.

Rats wrote: “The ‘buffer’ in the system is not unlimited; it’s a set of tanks with an end date.”

He noted that the key variable for oil prices is not just whether the conflict persists, but how much oil can pass through the strait and for how long.

In a benign scenario where flow quickly recovers, the disruption could be temporary, with Brent crude remaining in the $80-$90 range and then falling back as supply normalizes.

But if flow only partially recovers, causing daily shortages of several million barrels, prices may need to rise to rebalance supply and demand. Rats said: “In that case, $100 per barrel is not an alarming forecast; it’s a reasonable mechanism for rationing and rebalancing.”

The most severe scenario would be a disruption lasting several weeks. He emphasized: “By then, it’s no longer a stockpile issue but a demand destruction problem.”

Rats added: “The market will start to look for price levels that would significantly reduce consumption — possibly far above $130 per barrel — because the only remaining balancing tool is demand.”