The Strait of Hormuz disruption is still tightening the oil market, with Brent upside risks skewed higher

Overview

This Morgan Stanley The Oil Manual | Europe report focuses on the global oil market balance after sustained constraints in the Strait of Hormuz. The report notes that over the past eight weeks, the market has been in an unstable state of being both constrained and potentially releasable at any moment: the strait remains nearly closed to most flows, yet the market continues to expect that it could suddenly reopen. The authors seek to explain the gap between the sharp decline in Middle East exports, SPR releases, and observable inventory changes, and to assess demand destruction, unobservable inventories, and the subsequent price path.

Core views

The core view is that the supply shock related to the Strait of Hormuz has significantly tightened the global oil market. Demand has indeed declined, but not enough to fully explain the gap between supply losses and inventory data. The report estimates that loadings from the seven Middle East Gulf countries are about 14.2 mb/d below prior forecasts; if demand were unchanged, commercial inventories should have fallen by about 598 million barrels, yet identified inventory draws amount to only about 275 million barrels. This leaves a residual of about 324 million barrels, or about 5.7 mb/d, of which about 3.6-4.3 mb/d is attributed to genuine demand destruction and about 1.4-2.1 mb/d to changes in secondary and tertiary inventories. Morgan Stanley therefore lowers its demand forecast, but at the same time delays its assumption for Strait export recovery, ultimately concluding that the full-year balance remains tighter and Brent prices are supported.

Analysis framework

The report uses a combination of top-down and bottom-up methods. The top-down section starts with reduced Strait of Hormuz flows, diversion through alternative pipelines, prior supply growth expectations, SPR releases, and observable inventory changes to build a bridging table for the supply-demand gap. The bottom-up section breaks down demand destruction by refined product category, covering naphtha, LPG, jet fuel, diesel, gasoline, and fuel oil, while incorporating evidence from regional consumption, refinery runs, aviation activity, inventories, and price pass-through. Finally, the report cross-checks its conclusions using the crude balance and the decline in global refinery runs.

Methodology notes

• commodity_balanceSupply-demand balance bridging

  From supply losses to inventory and demand residuals

  It first calculates the decline in Strait of Hormuz flows and diversion through alternative routes, then adjusts for prior supply forecasts, the original surplus, and SPR releases to derive the theoretical inventory draw under an unchanged-demand scenario, and compares this with observable inventory draws.

• bottom_up_demandProduct-by-product demand destruction estimation

  Estimate real demand declines by product and region

  The report assesses supply constraints, price elasticity, inventory behavior, and reversibility across naphtha, LPG, jet fuel, diesel, gasoline, and fuel oil, and aggregates these into a central demand destruction estimate of 3.6-4.3 mb/d.

• inventory_analysisUnobservable inventory adjustment

  Secondary and tertiary inventories

  The report emphasizes that conventional data mainly cover crude oil and large primary inventories, making it difficult to capture inventories held by distributors, wholesalers, retailers, end users, and household tanks, so apparent demand during the disruption may be mixed with inventory changes.

• scenario_forecastAssumptions for the strait export recovery path

  Gradual production recovery after restart

  The report delays its assumption for Strait of Hormuz export recovery by one month, and assumes that after restart, 70% of lost production is restored over three months, followed by a recovery to 95% over the next three months, reflecting constraints from inventories, shipping, insurance confidence, and oilfield restart dynamics.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Dated Brent

  Core price forecast benchmark

  Strengths

  Persistent supply disruption, global inventory draws, and a slower recovery path all support prices.

  Weaknesses

  Demand destruction has already occurred meaningfully; if the strait recovers quickly, the risk premium could fall back.

  Comparison

  The report keeps its 2Q26 to 2H27 price forecasts unchanged, but emphasizes upside-skewed risks versus the base case.

  Risks

  A peace agreement, rapid reopening of the strait, greater-than-expected demand destruction, or changes in the pace of SPR releases.

• WTI/US crude exports

  Alternative supply and export beneficiary

  Strengths

  With Middle East exports constrained, global refiners rely more heavily on U.S. crude exports.

  Weaknesses

  Transportation, refinery compatibility, and inventory buffering capacity are limited.

  Comparison

  The report notes that after Strait exports fell about 90%, global refiners increased their pull on U.S. crude exports.

  Risks

  If Middle East supply recovers, support for U.S. exports may weaken.

• Jet fuel

  A refined product with clear demand destruction

  Strengths

  Once airspace and hubs recover, some demand could rebound relatively quickly.

  Weaknesses

  Middle East flight activity has fallen to about one-third of pre-war levels, significantly suppressing jet fuel demand.

  Comparison

  The report estimates central jet fuel demand destruction at about 500-600 kb/d.

  Risks

  Charter demand during Hajj, additional fuel burn from rerouting, and airline capacity cuts all create uncertainty.

• Diesel

  A demand component driven by both price pass-through and inventory behavior

  Strengths

  Apparent deliveries remain strong in some regions, possibly reflecting restocking and hoarding.

  Weaknesses

  European freight, discretionary road transport, and price-sensitive industrial demand have already shown price-driven declines.

  Comparison

  The report estimates central diesel demand destruction at about 700 kb/d.

  Risks

  If Russian export infrastructure in the Black Sea or Baltic remains impaired, the diesel market could shift from tightness to physical shortage.

• Gasoline

  A demand component with regional divergence

  Strengths

  Data from the U.S. and India still show strong deliveries, indicating that behavior has not yet changed materially in some markets.

  Weaknesses

  Some Asian refiners are supply-constrained, while emerging markets are seeing volume reductions due to price pass-through.

  Comparison

  The report estimates central gasoline demand destruction at about 700 kb/d.

  Risks

  Asian constraints may reverse after supply recovery; if high prices persist, emerging-market demand may continue to weaken.

• Fuel oil

  A refined product with smaller demand destruction and some offsetting consumption

  Strengths

  Seasonal Saudi power demand, shipping rerouting, and greater fuel switching in India have added some consumption.

  Weaknesses

  Fujairah fuel oil inventories have fallen to low levels, and Middle East bunker demand has been hit.

  Comparison

  The report estimates central fuel oil demand destruction at about 150-250 kb/d, one of the smaller impacts among the six product categories.

  Risks

  In the early phase of Strait reopening, reduced vessel detours and fading Saudi seasonal demand could initially widen and then narrow fuel oil demand destruction.

Key data

• Decline in loadings from the seven Middle East Gulf countries versus prior forecastsAbout 14.2 mb/dBased on a comparison between March 1 and April 25, 2026, and prior forecasts.
• Implied commercial inventory draw under an unchanged-demand scenarioAbout 598 million barrels, or about 10.5 mb/dDerived after accounting for SPR releases and prior surplus expectations.
• Identified inventory drawAbout 275 million barrels, or about 4.8 mb/dMainly includes oil-on-water inventories, non-Middle East and non-China crude inventories, and refined product inventories in the U.S., Singapore, Fujairah, Japan, and ARA.
• Unexplained residualAbout 324 million barrels, or about 5.7 mb/dThis must be jointly explained by genuine demand destruction and changes in unobservable secondary and tertiary inventories.
• Central estimate of demand destructionAbout 3.6-4.3 mb/dRoughly two-thirds of the 5.7 mb/d residual.
• Estimated change in unobservable inventoriesAbout 1.4-2.1 mb/dMainly from secondary and tertiary inventories across the supply chain and end-user levels.
• Full-year 2026 demand growth forecast-0.8 mb/dThe prior forecast was +0.7 mb/d.
• 2Q26 global demand revisionDown 3.7 mb/dReflecting the product-by-product assessment of demand destruction after the Hormuz shock.
• Q2 2026 global inventory change-4.9 mb/dThe implied balance after updated supply and demand assumptions.
• Full-year 2026 global inventory change-0.7 mb/dInventories still decline for the full year.
• Dated Brent price forecasts2Q26 $110/bbl, 3Q26 $100/bbl, 4Q26 $90/bbl, 1H27 $80/bbl, 2H27 $80/bblUnchanged in this report.
• Potential cumulative MEG-7 supply lossCould reach 1.5-2.0 billion barrels in 2026Depending on the pace of Strait recovery and the production restart path.

Impact & implications

The investment implication is that although weaker demand offsets part of the supply shock, it does not fully neutralize the supply gap caused by Strait constraints. If the strait remains unrecovered for an extended period, oil inventories will continue to fall and support Brent; if a peace agreement or restoration of navigation suddenly emerges, the risk premium may partially fade, but the report argues that production recovery, vessel return flows, normalization of insurance, and regional inventory clearing all require time, so supply recovery may be slower than the market expects. For refining, aviation, transportation, and the refined-products consumption chain, the shock is reflected jointly through supply shortages, price pass-through, inventory behavior, and route diversions.

Risks

• If the Strait of Hormuz reopens faster than expected, the oil price risk premium could fade quickly.
• If the conflict persists or escalates, Middle East supply losses, insurance costs, and vessel shortages could push prices even higher.
• Demand destruction estimates rely on incomplete data, and changes in secondary and tertiary inventories may lead to misreading of apparent demand.
• The scale, pace, and actual delivery of SPR releases remain uncertain and could alter inventory pressure.
• The production recovery path may be constrained by full regional inventories, tanker return flows, insurance market confidence, and the speed of oilfield restarts.
• Demand for jet fuel, diesel, gasoline, and other refined products varies significantly across regions, making it difficult for any single dataset to validate the global conclusion.

What to watch

• Daily transit counts of outbound oil tankers, LPG, and LNG through the Strait of Hormuz.
• MEG-7 loadings and utilization of alternative pipelines, especially Saudi Petroline and UAE ADCOP.
• Oil-on-water inventories, non-Middle East and non-China crude inventories, and refined product inventories in the U.S., Singapore, Fujairah, Japan, and ARA.
• The actual delivery progress of SPR releases, especially the remaining volumes for May-June.
• Whether the decline in global refinery runs remains in the 5-6 mb/d range.
• Flight activity, Hajj-related aviation demand, and airline capacity reduction plans for 2026.
• European diesel demand, emerging-market gasoline consumption, German heating-oil household and industrial inventories, and Turkey’s daily gasoline and diesel consumption data.
• Whether the Brent forward curve, prompt spreads, and refined-product crack spreads continue to reflect physical tightness.