Morgan Stanley has provided the Strait of Hormuz Situation report on the impact on global oil and gas prices as well as the market’s reaction to the current geopolitical tensions in the Middle East.
The Strait of Hormuz, a critical global energy chokepoint, is currently facing a disruption without historical precedent. While the waterway normally facilitates the transit of approximately 20 million barrels per day (mb/d) of crude oil and refined products, daily tanker traffic has recently collapsed from more than 30 transits to just one or two vessels.
Impact on Global Oil and Refining
Asian economies are the most vulnerable to this supply shock. China and India rely on the Strait for 40–50% of their seaborne oil imports, while Japan’s exposure reaches approximately 70%. Signs of strain are already appearing as Asian refiners consider or implement “run cuts” due to crude supply issues; for example, one Singapore refinery recently lowered its run rates from 85% to 60%.
Even without a total closure, shipping delays caused by security procedures or convoy operations could effectively remove 2–3 mb/d of supply due to reduced fleet productivity. Alternative export routes, such as the Saudi East-West and UAE Habshan-Fujairah pipelines, offer only about 3 mb/d of spare capacity—far below the Strait’s normal flow. Consequently, upstream production is being shut in; Iraq has already reduced output at the Rumaila field by 1.2 mb/d as storage hits critical levels.
The LNG Crisis
The disruption extends heavily into gas markets. LNG shipments through the Strait have halted, directly impacting Qatar, the world’s second-largest exporter at approximately 83 million tonnes per annum (mtpa). Because 85–90% of LNG from Qatar and the UAE is destined for Asia, regional gas markets face the most immediate disruption. While Europe is less directly exposed—with only 8% of its LNG originating from the Gulf—the resulting global competition for spot cargoes is expected to drive European gas (TTF) prices significantly higher.
Market Reaction and Geopolitical Response
The crisis has caused freight and tanker rates to surge sharply across global routes. Although oil fundamentals previously suggested Brent prices might drift toward the high-$50s, geopolitical supply risks now dominate the market’s direction.
In response, the U.S. government has announced it may provide political risk insurance and naval escorts for tankers. This strategy has a historical precedent in 1987’s “Operation Earnest Will”. For European energy majors, while a $10/bbl increase in Brent could boost free cash flow yields by 2–3%, these companies also face significant physical risk through their regional production and refining assets. The situation remains fluid, with the duration of the disruption serving as the primary factor for potential global gas demand destruction.
