Original Title: (WCTW) The Oil Market Breaking Point Is Here
Original Author: HFI Research
Translation: Peggy, BlockBeats
Editor's Note: This article argues that the global oil market has crossed the "breaking point." Going forward, the question is no longer whether oil prices will continue to rise, but how the real supply gap will manifest itself—whether through accelerated declines in crude oil inventories, shortages of refined products, or by suppressing demand through policy measures.
The core logic of the article is built on a variable underestimated by the market: time misalignment. Even if the Strait of Hormuz resumes traffic in the short term, the delays in tanker turnovers caused by prior transport interruptions will continue to erode onshore inventories in the coming weeks. This means that the supply problem will not immediately alleviate with "the resumption of navigation," but will instead be reflected in inventories and the spot market with a lag.
In this context, refinery behavior becomes a key amplifier. The cutbacks at Asian and European refineries do not mean that terminal demand is simultaneously weakening; rather, they would first compress refined product inventories, drive up prices, and then compel refineries to resume operations, creating a self-reinforcing cycle: high oil prices—profit compression—inventory destocking—profit recovery—increasing runs. This mechanism makes it difficult for the market to achieve rebalancing in the short term through conventional supply-demand adjustments.
More striking is the judgment that if the strait remains closed until after April, the traditional pricing framework for oil will become invalid. The market will not face a cyclical increase, but rather an extreme situation approaching "physical shortage"—in this state, pricing will no longer be an effective regulatory tool, and the ceiling on oil prices will lose its reference significance. What can truly bring the market back to balance is not supply recovery, but a "policy-driven demand suppression" similar to that during the pandemic.
Therefore, $95 per barrel is far from sufficient to restore balance in the oil market. With the ongoing geopolitical conflicts, what merits more attention in the future is not the price of oil itself, but changes in inventory, policy signals, and the pace of passive contractions in demand.
Here is the original text:
Please read the article "The Breaking Point of the Oil Market."
Related Reading: "Oil prices are approaching a breaking point; what will happen in mid-April?"
In our report published on March 25, we outlined several scenarios and pointed out that the breaking point of the oil market would occur around mid-April. Now, this breaking point has passed.
From this moment on, the supply interruption of 11 to 13 million barrels per day will manifest in one of the following three forms:
1) Decline in crude oil inventories;
2) Decline in refined product inventories;
3) Demand destruction.
If you are not very familiar with the logistics mechanism or logic behind this, let me clarify it for you.
The so-called "breaking point" of the oil market corresponds to the last batch of crude oil transported from the Persian Gulf to end users. Once these tankers finish unloading onshore, the subsequent inability to continue unloading will begin to consume onshore crude oil inventories. (For more details on the calculation of onshore inventories, please refer to previous analytical articles.)
Currently, global refinery shutdowns have exceeded about 5 million barrels per day, with about 3 million barrels per day concentrated in the Middle East. Refineries in Asia and Europe are also reducing their output, but a reduction in refinery operations does not mean that terminal demand has decreased.
The decrease in refinery utilization rates will accelerate the consumption of refined product inventories, thereby driving up refined product prices. This process will, in turn, enhance refinery profit margins, which will stimulate refineries to increase their output.
This cycle will play out repeatedly in the coming weeks: rising crude oil prices → refining profits compressed → reduced refined product supply → declining refined product inventories → recovery of refining profits → increased utilization → further rise in crude oil prices
In the spot market, this "game" will unfold between traders holding inventories and refineries without inventories. Of course, this situation can only last until onshore crude inventories are exhausted, and that point is not far off.
By the first week of May, the countries in Asia that will truly have residual crude oil inventory will only be Japan and China. Other nations will have to scramble for spot crude oil in the market. If the Strait of Hormuz is still closed at that time, you will see refineries go to any lengths to secure the raw crude oil they need—because the alternative would be to cease production.
For Europe, the crude oil shortage will manifest in the same time window. At that time, U.S. crude oil exports will approach 5.5 million barrels per day, and OECD countries’ crude oil inventories will drop to the minimum levels necessary for operations, with the remaining inventories primarily located in the U.S.
We anticipate that by the end of July, U.S. commercial crude oil inventories will fall below approximately 400 million barrels, nearing the operational minimum (about 370 million to 380 million barrels). This estimate also includes the release of about 139 million barrels from the Strategic Petroleum Reserve (SPR).
In the near future, the Donald Trump administration will likely have to simultaneously implement restrictions on crude oil and refined product exports. We believe the Trump administration will most likely first restrict refined product exports; if U.S. refineries start reducing output due to compressed profit margins, further restrictions on crude oil exports could follow—this would be an extremely negative scenario for U.S. shale oil and Canadian oil producers (which we will expand upon in future analyses).
It should be emphasized that all the aforementioned changes will occur regardless of whether the Strait of Hormuz reopens. Even if the U.S. and Iran reach an agreement and restore navigation through the Strait of Hormuz unconditionally, the consumption of onshore crude oil inventories is still unavoidable.
Logic Explained Again
Assuming by this Tuesday, the ceasefire ends, and a long-term peace agreement is reached.
The floating inventory in the tankers at sea is currently about 160 million barrels, and these crude oils will rapidly begin to unload. However, it takes about 30 to 40 days for these tankers to complete transportation and unloading; then another approximately 20 days for the return voyage.
Meanwhile, there are about 70 very large crude carriers (VLCCs) heading to the U.S. to load crude oil and transport it to Asia. The loading time for these tankers is about 6 to 8 weeks, and it takes 45 to 50 days to reach Asia, plus an additional 20 to 25 days to return after unloading and going through the Strait of Hormuz. In other words, this fleet will not be able to form effective return capacity for at least the next 3 months.
To alleviate the current backlog of onshore inventories in the Middle East, at least 100 VLCCs need to participate in the transportation. Onshore inventories are currently around 600 million barrels, and for oil-producing countries to resume production, inventories would need to be reduced by at least about 200 million barrels. However, from the existing capacity, this is physically not possible until at least mid to late June.
Once onshore crude oil inventories are gradually released, there will also need to be stable tanker flows passing through the Strait of Hormuz for shipping. At that stage, oil-producing countries such as Saudi Arabia, the UAE, Kuwait, Qatar, Iraq, and Bahrain can gradually resume production. This process will still take several weeks, which almost means that shortages in supply will persist.
According to our estimates in the March 25 report on the "Breaking Point," the cumulative inventory loss due to the closure of the strait has already reached about 1 billion barrels; by the end of April, it will expand to 1.2 billion barrels, by the end of May to 1.59 billion barrels, and by the end of June will be close to 1.98 billion barrels.
The market does not have enough commercial crude oil to fill such a large-scale supply gap. Thus, to avoid systemic imbalance, the only regulatory method must be "demand destruction."
This is not a judgment issue, but a simple math problem.
Geopolitical Issues
I have never liked geopolitics—it is full of uncertainty, lacks safety margins, is rife with gray areas, and there are rarely clear black-and-white lines. But on the issue of the Iran conflict, the situation seems to be heading toward an "either/or" extreme.
My friend PauloMacro recently recommended I read research by Professor Robert Pape, the author of "Escalation Trap." I have systematically read his relevant viewpoints over the past two months. He recently published an article titled "Why the Ceasefire Keeps Failing," which is worth reading.
From my personal observation, everything that occurred this weekend almost looked like a scene that walked straight out of a horror movie.
Since the conflict erupted at the end of February, most tankers have chosen to stand still and wait. There was previous speculation in the market that the closure of the Strait of Hormuz was due to expired insurance. I agreed with this assessment at the onset of the conflict, but with the developments, especially everything that happened this weekend, I was very shocked.
The Iranian Revolutionary Guard Corps (IRGC) has effectively implemented the blockade by threatening the tankers with force, directly threatening to open fire on them. We have seen this clearly from tanker activities. This is the first time since we began tracking tanker movements that we've seen such a large-scale collective turnaround of tankers. In the past, there might have been one or two tankers changing direction occasionally, but nothing on this scale as we witnessed this weekend.
To me, this conveys two signals: first, the IRGC has firmly controlled the Strait of Hormuz; second, this conflict is likely to further deteriorate before it gets better. Given the conditions put forth by the IRGC and Iran, it seems almost impossible for the U.S. to accept them, hence the real maneuvering space is extremely limited. To fundamentally resolve this issue, it is likely that it needs to be "really solved"—you should understand what I am implying. I fear that the worst case is yet to come, and I do not say this lightly.
Several Scenarios for the Oil Market
In the previous article discussing the oil market's "breaking point," we pointed out that if the Strait of Hormuz can resume traffic before the end of April, Brent crude oil prices would "drop back" to $110 per barrel; whereas today its trading price is $95.
But as I have explained earlier, the oil market has crossed the breaking point. The subsequent large-scale depletion of inventories will thoroughly awaken the market. I suspect that only when financial market participants see real crude oil shortages occurring will they realize that this supply interruption is not an illusion. Until then, most people will be unable to accept this reality.
The fact is,
If the Strait of Hormuz does not reopen until after April, we will no longer be able to provide accurate oil price forecasts. Because by then, the market will have crossed an irreversible boundary. This will be the largest supply interruption in the history of the oil market, approximately four times larger than previous records. In such cases, traditional fundamental pricing theories will lose significance, as "absolute shortages" cannot be measured by price. Once a market runs out of fuel, it is simply cut off.
What price will that last marginal oil trade at? I do not know, and I do not think anyone will be clever enough to know the answer.
Yet, what I do know is that demand destruction will definitely occur. For those concerned with oil, what will truly "kill" demand will be announcements at the policy level. To balance the daily supply interruption of about 11 to 13 million barrels globally, there must be a demand drop on a scale comparable to that during the pandemic lockdowns.
Even under such extreme scenarios, the market will only barely "balance" and will not shift into oversupply. But at least it can mitigate price shocks. By that time, analysts like me, who focus on "barrel counts," will be able to determine when the true turning point in fundamentals occurs.
So, to sum up in a few sentences: If the Strait of Hormuz remains closed after April, I do not know how high oil prices will go, but it certainly will not be $95 per barrel. Policy-driven demand destruction will rebalance the oil market, but it will only prevent inventories from continuing to deteriorate.
We have established a system of market signals to monitor when this turning point comes.
Conclusion
The breaking point of the oil market has arrived. Global onshore crude oil inventories will plummet sharply, and the rate of decline will be unprecedented. U.S. crude oil inventories are the last to start decreasing, and we will see this in next week’s report from the U.S. Energy Information Administration (EIA). Once the market sees the obvious decrease in onshore inventories, prices will quickly surge again.
If the Strait of Hormuz has not reopened after the end of April, then no one can tell you where the peak price of oil will be. By then, the market will have entirely crossed that line. The only way to rebalance oil prices is through demand destruction. Therefore, rather than fixate on "how much oil prices will go," it is better to track those truly critical market signals.
But if this article needs to leave you with only one conclusion, it is this: The oil market cannot achieve rebalancing at $95 per barrel. Oil prices must rise to a level sufficient to offset a daily supply interruption of approximately 11 to 13 million barrels. Governments will have to implement mandatory demand compression policies like those during the pandemic to suppress demand. Even so, it will only offset the supply gap and will not push the oil market back into an oversupply state. From a geopolitical perspective, I fear the situation has entered a phase of "further deterioration before it gets better," as neither the U.S. nor Iran appears willing to compromise.
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