Morgan Stanley: Hormuz Strait Recovery Delayed, Raises Mid- to Long-Term Oil Price Forecasts

Overview

This macroeconomic research report focuses on analyzing the pathways and timelines for the recovery of oil production in the Middle East and along the Hormuz Strait following recent geopolitical tensions. Morgan Stanley contends that the current Brent crude price of $92 per barrel reflects an overly optimistic market valuation—one that assumes a swift reopening of the strait and rapid restoration of capacity. In reality, physical, logistical, and operational constraints will make the supply recovery slower and more convoluted than anticipated. Accordingly, the firm has revised its assumptions about the strait’s reopening and raised its oil price forecasts for the fourth quarter of this year and the first quarter of next year, warning of significant upside risks in the months ahead.

Core views

Supply recovery faces six major real-world bottlenecks: even if a ceasefire is reached, the resumption of navigation through the Hormuz Strait and the restart of oilfields cannot happen overnight. First, mine clearance and the normalization of insurance premiums will take weeks to months. Second, idle tankers have been redeployed elsewhere globally, creating severe mismatches in their reassembly. Third, Gulf states’ storage tanks are overflowing due to export disruptions, preventing field restarts until vessels can pick up shipments. Fourth, prolonged shutdowns of four to five months have left some 4,000 to 5,000 wells at risk of pressure loss and pipeline blockages, with restart complexity and costs increasing with downtime. Fifth, certain downstream refineries and export terminals have sustained physical damage, requiring two to three quarters to repair. Finally, the departure of service personnel and equipment leaves initial recovery phases short-staffed and under-equipped. Short- to medium-term crude oil supply gaps will widen significantly: based on these bottlenecks, Morgan Stanley has pushed back its assumption for the start of a substantial rebound in Hormuz Strait exports from late May to late July and adjusted its recovery pace from “70% in three months” to “75% in four months.” This delay has tightened its global liquid-fuel supply-and-demand model dramatically: the third-quarter market deficit is now projected to surge from the previously estimated 300,000 barrels per day to 4.5 million barrels per day. Consequently, the third quarter will see the continuation—and intensification—of the tight conditions observed in the second quarter, with inventories continuing to deplete. The existing market “cushion” is rapidly eroding: earlier oil prices did not spike primarily thanks to several buffer mechanisms, but these are now reaching their limits. First, global Strategic Petroleum Reserve (SPR) releases are expected to drop from roughly 2.5 million barrels per day in the second quarter to around 700,000 barrels per day in July–August. Second, U.S. gasoline and diesel inventories have fallen below their five-year seasonal lows; if the Hormuz Strait does not reopen promptly, the U.S. may be forced to curtail crude and refined-product exports to ensure domestic supply, further tightening global markets. Third, Chinese buyers have locked in very little spot crude over the past five months; should the strait remain closed, China will likely need to return to the spot market in mid-to-late June to secure September-delivery cargoes, driving prices higher. Upward revisions to mid- to long-term oil price forecasts: after inflation adjustment, Brent currently trades near its 20-year median ($92 per barrel), fully pricing in a “smooth and rapid recovery” scenario. Morgan Stanley views this valuation as overly optimistic. Accordingly, the firm maintains its second- and third-quarter 2026 forecasts of $110 and $100, respectively, while raising its fourth-quarter estimate from $90 to $95 and its first-quarter 2027 forecast from $80 to $85. In the longer term, once supply fully normalizes, oil prices are still expected to converge toward an 80-dollar-per-barrel equilibrium.

Analysis framework

The report employs a rigorous ‘event-driven plus quantitative supply-and-demand fundamentals’ analytical framework. First, by comparing historical data, it establishes that the current price ($92) sits at the 50th percentile of the past 20 years after inflation adjustment, anchoring the baseline state where the market has priced in a ‘perfect recovery’ scenario. Next, the team delves into the mid- and downstream segments of the industry, meticulously mapping out six discrete stages—from political ceasefires to physical production restarts (security clearance, navigation resumption, tank farm release, well restart, facility repair, personnel deployment)—and translating qualitative impediments into quantifiable delays (pushing the reopening to late July) and efficiency reductions (restoring 75% in four months). Finally, the adjusted supply curve is plugged into a global supply-and-demand balance sheet, factoring in marginal variables such as Sino-U.S. import-export dynamics and SPR release schedules, to derive a third-quarter supply gap of 4.5 million barrels per day, naturally leading to the conclusion of revising long-term oil prices upward.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Derivation of the Supply-Demand Balance Sheet and Inventory Cycles

  By quantifying marginal changes on both the supply side (Middle Eastern recovery progress) and the demand/buffer side (Sino-U.S. trade, SPR releases), the report calculates the explicit supply-demand gap in the global crude oil market (e.g., a 4.5-million-barrel-per-day deficit in the third quarter). In commodity pricing logic, a widening supply gap inevitably accelerates inventory drawdowns, providing strong support to spot and near-month contract prices.

• Event博弈 and Behavioral FinanceExpectation Gap/Expectation Management

  Analysis of Expectation Gaps in Futures Market Pricing

  The report points out that Brent crude has retreated to its historical median, indicating that the futures market (as evidenced by the narrowing M1-M2 spread) has already priced in an optimistic expectation of a “swift strait reopening.” The analysis hinges on identifying the gap between this “market expectation” and the “physical bottlenecks on the ground”; when reality lags behind expectations, upward price correction momentum emerges.

Key data

• Current Brent Crude Priceapproximately $92 per barrelAt the 50th percentile of the past 20 years’ inflation-adjusted price distribution (historical median).
• Assumed Timing of Strait Export Recoverylate JulyDelayed by roughly two months compared to the previous model assumption of late May.
• Assumed Rate of Middle Eastern Production Recovery75% restored within four monthsA slowdown from the earlier assumption of “70% in three months.”
• Global Crude Oil Supply Gap in Q3 2026-4.5 million barrels per dayThe deficit has widened significantly from the previously estimated -300,000 barrels per day due to the recovery delay.
• Brent Oil Price Forecast for Q4 2026$95 per barrelRaised by $5 from the previous forecast of $90 per barrel.
• Brent Oil Price Forecast for Q1 2027$85 per barrelIncreased by $5 from the earlier prediction of $80 per barrel.
• Number of Affected Wellsapproximately 4,000–5,000These wells face restart challenges after 4.5–5 months of shutdown.
• Damaged Refinery Capacityapproximately 2.5 million barrels per dayDownstream refining capacity that remains offline due to physical damage, expected to require two to three quarters to repair.

Impact & implications

The report suggests that if Middle Eastern oil production does not recover swiftly in the coming weeks, the buffers currently preventing a sharp spike in oil prices—strategic reserve releases, high U.S. exports, and low Chinese imports—will be exhausted. For the global energy market, this means that the third-quarter supply shortage could prove far more severe and protracted than the curve anticipates. Should the U.S. cut exports due to domestic inventory pressures, or if Chinese buyers are compelled to return to the spot market in mid-to-late June to secure September-delivery cargoes, Brent crude prices will face significant upside risks.

Risks

• Geopolitical Risk: The U.S. and Iran may reach a substantive ceasefire or a strait-patrol agreement sooner than expected, accelerating the reopening of the Hormuz Strait.
• Faster-than-Expected Recovery: Oilfields across the Middle East could resume production more quickly than the model’s four-month, 75%-recovery assumption.

What to watch

• The actual status of navigation through the Hormuz Strait and the progress of mine-clearance operations.
• Whether the global Strategic Petroleum Reserve (SPR) releases in July–August decline as scheduled.
• Changes in U.S. domestic gasoline and diesel inventories and their impact on crude oil export policy.
• Chinese buyers’ crude-oil purchasing behavior in mid-to-late June for September-delivery contracts.