The Strait of Hormuz disruption continues to support Brent, with upside risk outweighing downside risk
AI summary card
The Strait of Hormuz disruption continues to support Brent, with upside risk outweighing downside risk
Morgan Stanley believes that Middle East exports are down about 14.2 mb/d versus prior forecasts, while observable inventories have fallen by only about 4.8 mb/d, with the gap mainly absorbed by demand destruction and hard-to-observe secondary and tertiary inventories.
- Eight weeks after the closure of the Strait of Hormuz, MEG-7 loadings are about 14.2 mb/d below prior forecasts, and export transit remains near a standstill.
- If demand had remained unchanged, commercial inventories should have fallen by about 598 million barrels over eight weeks; identified inventory declines total about 275 million barrels, leaving a gap of about 5.7 mb/d.
- Bottom-up estimates show demand destruction of about 3.6-4.3 mb/d across gasoline, jet fuel, diesel, naphtha, LPG, and fuel oil, explaining roughly two-thirds of the residual.
- The remaining roughly 1.4-2.1 mb/d may come from secondary and tertiary inventory changes, such as deferred restocking by wholesalers, retailers, end users, and households.
- The report keeps Brent price forecasts unchanged, but believes the supply-demand balance remains tight and price risks are skewed to the upside.
Report interpretation
Overview
This report discusses the impact of Strait of Hormuz constraints on the global oil market. It argues that the market is simultaneously in two states: physical logistics are severely constrained, yet a peace agreement or shipping recovery could release part of the risk premium at any time. Morgan Stanley believes there is still a significant gap among current supply losses, SPR releases, observable inventories, and demand changes, and that the oil market is continuing to tighten.
Core views
The core views are: first, MEG-7 supply related to the Strait of Hormuz is about 14.2 mb/d below prior forecasts, and alternative pipelines plus SPR releases can offset only part of the shock; second, identified inventory declines are insufficient to explain the full supply gap, and the residual of about 5.7 mb/d must be explained by genuine demand destruction and unobservable inventory changes; third, demand destruction is not driven by a single mechanism—naphtha and LPG are mainly constrained by supply, jet fuel is affected by airspace and hub airport restrictions, diesel and gasoline reflect both price elasticity and supply constraints, while fuel oil has offsets from vessel rerouting, Saudi summer power generation, and India's gas-to-oil switching; fourth, although demand forecasts have been cut, assumptions for export recovery have also been pushed back to late May, leaving the full-year balance tighter by about 1.5 mb/d.
Analysis framework
The report uses a combination of top-down and bottom-up approaches. The top-down section starts from the decline in Hormuz flows, alternative pipelines, expected supply growth, prior supply-demand surplus, SPR releases, and observable inventory draws to calculate the unexplained supply-demand residual. The bottom-up section breaks down demand destruction across gasoline, jet fuel, diesel, naphtha, LPG, and fuel oil by product and region, and cross-checks the aggregate with product-level facts and price signals.
Methodology notes
Bridge supply losses, alternative transportation, SPR releases, observable inventories, and demand changes item by item.
The report first estimates the MEG-7 loading shortfall versus the original forecast, then subtracts the previously expected surplus and SPR releases to derive the scale of commercial inventory declines that should have occurred if demand were unchanged; it then compares this with actual identifiable inventory declines, arriving at a residual of about 5.7 mb/d.
Estimate demand destruction by product, region, and mechanism.
The report splits demand destruction into six categories—naphtha, LPG, jet fuel, diesel, gasoline, and fuel oil—and distinguishes among supply constraints, price-driven effects, inventory behavior, policy buffers, and additional consumption caused by rerouting.
Explain supply-chain and end-user inventory changes that are not observable in reported statistics.
The report argues that part of the apparent decline in demand does not reflect vanished real consumption, but rather delayed restocking by wholesalers, retailers, industrial users, and households amid high prices or supply uncertainty, especially along the refined products chain.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Brent crude oilCore price benchmark
- Strengths
- Global inventories are still declining, recovery of Hormuz-related supply is delayed, summer demand may strengthen, and the report maintains elevated price forecasts.
- Weaknesses
- If a peace agreement or shipping recovery suddenly materializes, the risk premium could fade quickly.
- Comparison
- The report keeps Brent forecasts unchanged from 2Q26 through 2H27, but believes risks are skewed to the upside.
- Risks
- Geopolitical easing, greater-than-expected demand destruction, and buffering from SPR releases and alternative supply.
- naphthaSupply-constrained petrochemical feedstock
- Strengths
- Asian crackers are clearly affected by Middle East supply shortages, and demand may recover quickly once supply is restored.
- Weaknesses
- Some Middle East cracking units are damaged, and structural capacity recovery may be slower.
- Comparison
- Demand destruction midpoint is about 800-900 kb/d, making it one of the most visibly affected products.
- Risks
- Persistent damage to Middle East facilities and slower-than-expected recovery in Asian cracker run rates.
- lpgResidential fuel and PDH feedstock
- Strengths
- Demand in India and China is suppressed by supply availability, and some demand could rebound once Middle East shipping recovers.
- Weaknesses
- Substitution away from residential fuel in India and PDH shutdowns in China indicate deeper supply-chain disruption.
- Comparison
- Demand destruction midpoint is about 750-900 kb/d, alongside naphtha as a major contributor.
- Risks
- Damage to Middle East NGL facilities, uncertainty over PDH chain recovery, and continued policy-driven fuel substitution.
- jet fuelAviation-sensitive product exposed to airspace restrictions
- Strengths
- Once airspace and airports recover, part of aviation demand could rebound relatively quickly.
- Weaknesses
- Middle East flight activity remains significantly below pre-war levels, and airlines have already begun cutting capacity.
- Comparison
- Demand destruction midpoint is about 500-600 kb/d, lower than naphtha and LPG but supported by stronger factual evidence.
- Risks
- Hajj demand, flight rerouting, and uncertainty around the pace of airport and airspace recovery.
- dieselIndicator of industrial and freight demand
- Strengths
- Apparent demand in some regions is still supported by restocking, hoarding, and price controls.
- Weaknesses
- Europe has already seen price-driven declines in freight, discretionary road transport, and industrial demand.
- Comparison
- Demand destruction midpoint is about 700 kb/d, but apparent deliveries may overstate true end demand.
- Risks
- Damage to Russian Black Sea or Baltic export infrastructure, and further price pass-through in Europe suppressing demand.
- gasolineConsumer mobility and emerging-market price elasticity
- Strengths
- Demand data in the US and India remain relatively resilient, and some Asian demand could recover once supply is restored.
- Weaknesses
- Markets such as Nigeria, Egypt, and Argentina have already seen clear declines in demand driven by prices or policy.
- Comparison
- Demand destruction midpoint is about 700 kb/d, with mixed mechanisms and significant regional differences.
- Risks
- Broader price pass-through in emerging markets and continued government rationing or usage restrictions.
- fuel oilMarine fuel, power generation, and industrial substitute fuel
- Strengths
- Saudi summer power generation, vessel rerouting, and India's gas-to-oil switching offset part of the demand loss.
- Weaknesses
- Fujairah bunker demand and heavy distillate inventories have been clearly affected.
- Comparison
- Demand destruction midpoint is about 150-250 kb/d, the smallest among the six product categories.
- Risks
- After Hormuz reopens, rerouting demand could fall and temporarily widen fuel oil demand destruction.
Key data
- Decline in MEG-7 loadings versus original forecastabout 14.2 mb/dEstimated for the March 1 to April 25 window, including originally expected supply growth for 2026.
- Decline in Hormuz flows929 million barrels, about 16.3 mb/dCompared with the same period in 2025.
- Offset from alternative routesabout 191 million barrels, about 3.4 mb/dMainly from Saudi Petroline and UAE ADCOP operating near full capacity.
- Expected SPR releasesabout 175 million barrels in total, of which about 100 million barrels had entered the market in March-AprilThe remaining releases are planned for May and June.
- Implied commercial inventory decline under unchanged demandabout 598 million barrels, about 10.5 mb/dUsed to measure the theoretical inventory pressure from the supply shock.
- Identified inventory declineabout 275 million barrels, about 4.8 mb/dMainly includes declines in floating storage, non-MEG/non-China crude inventories, and refined product inventories in the US and Singapore.
- Unexplained residualabout 324 million barrels, about 5.7 mb/dMust be explained by genuine demand destruction and unobservable inventory changes.
- Bottom-up demand destructionmidpoint about 3.6-4.3 mb/d, range about 2.7-5.4 mb/dCovers naphtha, LPG, jet fuel, diesel, gasoline, and fuel oil.
- Unobservable inventory changesabout 1.4-2.1 mb/dMainly corresponds to secondary and tertiary inventory changes.
- Brent price forecast2Q26 $110/bbl, 3Q26 $100/bbl, 4Q26 $90/bbl, 1H27 and 2H27 both $80/bblThis report keeps previous forecasts unchanged.
Impact & implications
The implication for investors and commodity markets is that oil prices remain supported in the near term by physical supply constraints and inventory drawdowns. If the Strait of Hormuz reopens faster than expected, the risk premium could retreat; but if export recovery continues to be delayed, summer travel demand begins, and secondary and tertiary inventories need to be rebuilt, Brent may continue to find support. At the product level, the shocks to naphtha and LPG are more likely to reverse quickly once logistics recover; price-driven demand destruction in diesel and gasoline is stickier; and fuel oil could see nonlinear adjustments in the early stages of reopening.
Risks
- A peace agreement or rapid recovery in Strait of Hormuz shipping could pull back the oil price risk premium.
- Demand destruction could exceed the report's estimate, easing inventory pressure and weighing on Brent.
- SPR releases, alternative pipelines, and non-MEG supply buffers could prove stronger than expected.
- Middle East export recovery could be slower than market pricing implies, prolonging supply gaps and inventory draws.
- Rebuilding demand for secondary and tertiary inventories could emerge at high price levels, further tightening prompt markets.
- Recovery paths for aviation, petrochemicals, diesel, and gasoline demand may vary by product and region.
What to watch
- Whether tanker departures through the Strait of Hormuz and MEG-7 loadings recover.
- Changes in Brent prompt spreads, the DFL curve, and spot premiums.
- Observable inventories from Vortexa, Kpler, and the EIA, especially revisions to floating storage.
- The pace at which SPR releases actually enter the market and the remaining release volume.
- Asian naphtha and LPG purchases, as well as cracker and PDH operating rates.
- Middle East flight activity, jet fuel demand during Hajj, and airline capacity adjustments.
- European diesel demand, Russian export infrastructure, and gasoline policies in emerging markets.
- High-frequency data such as German heating oil and Turkish gasoline/diesel that can reveal secondary or end-user demand.