Why a research firm says oil is at a 'breaking point,' and prices aren't coming back down soon
VCG/VCG via Getty Images
- Oil is entering a cycle in which sustained supply shortages will drive prices higher, HFI Research says.
- The firm is eyeing plummeting crude inventories around the world.
- It will take months for oil supplies to return to the market, even after a peace deal, it added.
Peace between the US and Iran remains elusive, but don't expect oil prices to drop quickly even when a deal is hammered out, according to one research firm.
HFI Research, an investment research firm focused on energy and commodities, said it believes the oil market has reached a "breaking point" after two months of the Iran war, and that supply disruptions will be long-lasting.
Even if the US and Iran were to strike a deal this week, the market will be dealing with severe shortages and eventual demand destruction, thanks largely to the damage already inflicted on refining capacity, the firm said in a note on Sunday.
"The oil market breaking point is here. Global onshore oil inventories are going to plummet, and the decline will be at a pace no one has ever seen before," HFI wrote.
"If the Strait of Hormuz remains closed past April, no one will be able to tell you where oil prices top out. We will have gone too far into the Rubicon," the firm added.
HFI, which first predicted that oil would hit a breaking point in late March, said it believes the market is now headed for a repeating cycle in which a shortage of physical oil begets higher prices. That's largely because of the limited oil-refining capacity in the Middle East, it said, estimating that the war had pushed global refinery outages to over 5 million barrels a day.
Higher oil prices put pressure on refining profits, as the price of oil is rising faster than the price of refined products. That causes refiners to cut production, which leads consumers to burn through oil and gas inventories faster, the firm speculated.
HFI said it expected that most Asian refiners would need to "scramble for barrels" by the first week of May. Europe will also start to feel the pain of the supply shortage by then, and the US will likely draw down its commercial oil stores to around 400 million barrels, just above the "operational minimum" of around 380 million barrels, the firm said.
The firm estimated that the cumulative amount of oil stores lost due to the closure of the Strait of Hormuz was around 1 billion barrels. The shortage is on track to swell to 1.98 billion barrels by the end of June, it added.
Even if a "long-lasting peace deal" with Iran were to be reached this week, it will likely take months for oil supplies to be restored, HFI said. It is estimated that it would take 30-40 days to transport and offload barrels that are ready to come to market, and another 20 days for tankers carrying those barrels to return to their original locations.
"We do not have enough commercially available crude for that much supply loss. This is why demand destruction is needed to prevent such a scenario from materializing. This is just math," the firm said.
Demand destruction will need to be at the same magnitude as see during the COVID-19 lockdowns, the firm said, basing its estimates on the current global oil supply shortage of around 11 million to 13 million barrels a day.
"The onslaught of oil inventory draws coming will shock the market awake. I suspect that only when financial players see the physical shortages playing out will they wake up to the reality that this supply outage is real. Until then, most people will not be able to accept the reality," the firm added.
Despite a sharp relief rally after Iran said the Strait of Hormuz was open to commercial traffic last Friday, oil forecasters remain wary of the supply outlook in the Middle East. The ceasefire between the US and Iran looks fragile, and the nations are approaching the April 22 deadline for a deal.
Analysts at Societe Generale said on Monday they believed oil production among OPEC nations likely wouldn't normalize for nine months, citing their analysis of historical supply shocks. Oil demand likely won't normalize until six months after the conflict officially ends, they added.
from Business Insider https://ift.tt/tYM48GQ
No comments