The Daily View: Worsening base case

THE optimist’s assertion that a return to pre-February 28 conditions in the Strait of Hormuz was possible had been dashed weeks ago.

Even the best-case scenarios now come caveated with implications from the long-term scarring effects on markets and complex unwinding with months of recalibration baked in.

The doomsday scenario that sees Hormuz mired in long-term conflict and effectively closed to the majority of traffic with knock-on consequences for all other maritime chokepoints as a result, remains an outlier, albeit less so with each day that passes.

The base case scenarios, however, are becoming worse as the previous predictions of normalisation are extended and the oil price forecasts continue to head north.

We are entering oil major financial reporting season this week with all eyes and ears fixed on what the chief executives say, or don’t say, in terms of forward-looking statements.

Goldman Sachs now estimate that Brent crude will trade at about $90 a barrel in the last quarter of this year, up from an earlier projection of $80. Morgan Stanley is plumping for a reopening of Hormuz by late May, with Brent hitting $110 a barrel in the second quarter, slowly falling towards $80 a barrel next year.

But even the banks concede they may now be underplaying the actual risk.

If exports do not return to normal levels until the end of July and if there is a “persistent reduction” of Middle East Gulf production capacity of 2.5m barrels per day, then oil could average nearly $120 in the fourth quarter, notes Goldman in its latest revision.

Disruption tends to be profitable for shipping, right up until it isn’t. A sustained oil price over $100 a barrel is usually the point at which demand destruction becomes a big problem for everyone.

Asian refineries continue to reduce throughput, but if reductions turn into shutdowns the base case scenarios are going to be revised significantly.

Demand is down in Asia, but if Hormuz remains closed it will have to fall further.

As Braemar pointed out in its latest assessment of the worsening situation, at least seven Asian governments have imposed work-from-home mandates. Five have rationed transport fuel. Diesel-intensive businesses are operating part-time, and petrochem plants and plastic makers are shutting.

European taxes have thus far sheltered its consumers from higher prices, but even Europe’s refinery output, and stocks, will plummet if Hormuz stays closed beyond May.

Traffic through the strait more than halved last week after Iran reinstated restrictions and tensions escalated into vessel attacks and seizures, leaving only a trickle of non-Iranian ships willing to transit.

As of Monday, there was precious little to suggest any resumption of Hormuz traffic was imminent.

Richard Meade
Editor-in-chief, Lloyd’s List

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