Beyond the Tipping Point: Price Hikes Are Just the Prelude, Oil Market Faces "Physical Supply Disruption"

Original Title: (WCTW) The Oil Market Breaking Point Is Here

Original Author: HFI Research

Original Compilation: Peggy, BlockBeats

Editor's Note: This article argues that the global oil market has passed a "breaking point." From now on, the question is no longer whether oil prices will continue to rise, but rather how the actual supply gap will manifest itself—whether through accelerated crude inventory drawdowns, refined product shortages, or policy-driven demand suppression.

The core logic of the article is built on a variable underestimated by the market: a timing mismatch. Even if the Strait of Hormuz reopens in the short term, the shipping delays caused by the initial transportation disruption will continue to erode onshore inventories for weeks to come. This means the supply issue will not be immediately alleviated with "reopening" but will be reflected with a lag in inventories and the spot market.

Against this backdrop, refinery behavior becomes a key amplifier. The reduction in throughput at Asian and European refineries does not mean end-user demand has weakened simultaneously. Instead, it will first compress refined product inventories and push up product prices, which in turn will force refineries to ramp up operations, creating a self-reinforcing cycle: high crude prices → margin compression → inventory drawdown → margin recovery → increased throughput. This mechanism makes it difficult for the market to rebalance through conventional supply-demand adjustments in the short term.

A more impactful judgment is that if the Strait's closure persists beyond April, traditional oil price frameworks will become ineffective. The market will face not a cyclical price increase but a scenario approaching "physical shortage"—a state where price is no longer an effective adjustment tool, and price ceilings lose their reference value. What can truly bring the market back into balance is not supply recovery but "policy-driven demand suppression," similar to what occurred during the pandemic.

Therefore, $95 per barrel is far from sufficient to rebalance the oil market. Given the ongoing geopolitical tensions, what deserves more attention in the future is not the oil price itself, but rather inventory changes, policy signals, and the pace of passive demand contraction.

Below is the original text:

Please read the article "The Oil Market Breaking Point."

Related Reading: "Oil Prices Are Approaching a Breaking Point; What Will Happen in Mid-April?"

In our report published on March 25, we outlined various scenarios and indicated that the oil market's breaking point would arrive in mid-April. That breaking point is now behind us.

From this moment on, the disruption of 11 to 13 million barrels per day will manifest in one of three forms:

1) Crude inventory drawdowns;

2) Refined product inventory drawdowns;

3) Demand destruction.

If you are unfamiliar with the logistics mechanism or the logic behind it, let me walk you through it.

The so-called "breaking point" in the oil market corresponds to the last batch of crude oil shipped from the Persian Gulf to end-users. Once these tankers are unloaded onshore and subsequent unloading cannot continue, onshore crude inventories will begin to be drawn down. (For more details on onshore inventory calculations, refer to previous analytical articles.)

Currently, global refinery shutdowns exceed approximately 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 throughput, but refinery cuts do not mean end-user demand has already declined.

The reduction in refinery throughput will accelerate the drawdown of refined product inventories, thereby pushing up product prices. This process, in turn, will improve refining margins, stimulating refineries to increase throughput.

This cycle will play out repeatedly in the coming weeks: Crude prices rise → Refining margins compress → Refined product supply decreases → Refined product inventories draw down → Refining margins recover → Throughput increases → Crude prices rise further.

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 depleted, and that point is not far off.

By the first week of May, the only countries in Asia with any meaningful crude inventory buffer will be Japan and China. Other countries will have to scramble for spot crude in the market. If the Strait of Hormuz remains closed by then, you will see refineries going to any lengths to secure the crude they need—because the alternative is shutting down.

For Europe, crude shortages will also manifest within the same timeframe. By then, U.S. crude exports will be approaching 5.5 million barrels per day, OECD crude inventories will have fallen to operational minimums, and the remaining inventory buffer will be concentrated primarily in the United States.

We estimate that by the end of July, U.S. commercial crude inventories will fall below approximately 400 million barrels, approaching operational minimums (around 370-380 million barrels). This estimate also includes the release of about 139 million barrels from the Strategic Petroleum Reserve (SPR).

In the coming period, the Donald Trump administration will likely have to impose restrictions on both crude and refined product exports. We judge that the Trump administration will most likely first restrict refined product exports; if U.S. refineries start cutting throughput due to margin compression, crude export restrictions may follow—an extremely dire scenario for U.S. shale and Canadian oil producers (which we will explore in subsequent analysis).

It is crucial to emphasize that all the changes described above will occur regardless of whether the Strait of Hormuz reopens. Even if the U.S. and Iran reach an agreement to unconditionally reopen the Strait, the drawdown of onshore crude inventories remains inevitable.

Explaining the Logic Once More

Assume a ceasefire ends this Tuesday, and a long-term peace agreement is reached.

The floating inventory in tankers at sea is currently about 160 million barrels. This crude will quickly begin unloading. However, it takes these tankers 30 to 40 days to complete transportation and unloading; the return voyage then requires an additional ~20 days.

Simultaneously, there are about 70 VLCCs (Very Large Crude Carriers) en route to the U.S. to load crude for Asia. The loading cycle for these tankers is about 6 to 8 weeks, the voyage to Asia takes 45 to 50 days, and unloading and returning through the Strait of Hormuz takes another 20 to 25 days. In other words, this fleet cannot provide effective return shipping capacity for at least the next 3 months.

To alleviate the current backlog of onshore inventory in the Middle East, at least 100 VLCCs would need to be involved in transportation. Current onshore inventory is about 600 million barrels, and to allow producing countries to resume production, inventory needs to be reduced by at least ~200 million barrels. Based on available shipping capacity, this is physically impossible to achieve until at least mid-to-late June.

After onshore crude inventories are gradually released, a steady flow of tankers through the Strait of Hormuz for loading is still required. At that stage, producing countries like Saudi Arabia, the UAE, Kuwait, Qatar, Iraq, and Bahrain can gradually resume production. This process will also take weeks, almost guaranteeing that supply shortages will persist.

According to our estimates in the March 25 "Breaking Point" report, the cumulative inventory loss due to the Strait's closure has already reached about 1 billion barrels; it will expand to 1.2 billion barrels by the end of April, 1.59 billion barrels by the end of May, and approach 1.98 billion barrels by the end of June.

There is not enough commercial crude oil in the market to fill a supply gap of this magnitude. Therefore, to prevent systemic imbalance, the only adjustment mechanism left is "demand destruction."

This is not a matter of judgment; it's simple arithmetic.

The Geopolitical Issue

I have never liked geopolitics—it's full of uncertainty, offers no margin of safety, is rife with gray areas, and rarely presents clear black-and-white distinctions. But on the issue of the Iran conflict, the situation seems to be moving toward an extreme "either-or" scenario.

My friend PauloMacro recently recommended I read the research of Professor Robert Pape, author of "The Escalation Trap." I have systematically read his related views over the past two months. He recently published an article, "Why the Ceasefire Keeps Failing," which is worth reading.

From my personal observation, everything that happened this weekend seemed almost like a scene straight out of a horror movie.

Since the conflict erupted in late February, most tankers have chosen to stay put and wait. There was a prevailing market narrative that the Strait of Hormuz was closed due to insurance becoming invalid. I agreed with this assessment early in the conflict, but as events unfolded, especially everything this weekend, I was utterly shocked.

The Islamic Revolutionary Guard Corps (IRGC) essentially enforced a blockade through the threat of force, directly threatening tankers with firing. We saw this clearly in tanker activity. Since we began tracking tanker movements, this is the first time we've seen such a large-scale collective U-turn by tankers. There have been occasional one or two tankers changing course in the past, but nothing on the scale seen this weekend.

In my view, this sends two signals: First, the IRGC has firm control over the Strait of Hormuz. Second, this conflict is likely to get worse before it gets better. Judging by the conditions set by the IRGC and Iran, they are almost impossible for the U.S. to accept, leaving very little room for maneuver in reality. To fundamentally resolve this issue, it probably requires "truly resolving" it—you should understand what I'm hinting at. I fear the worst is yet to come, and I say this not to be alarmist.

Scenarios for the Oil Market

In the previous article discussing the oil market's "breaking point," we noted that if the Strait of Hormuz reopened before the end of April, Brent crude prices would "retreat" to $110 per barrel; today it trades at $95.

But as I've already explained, the oil market has passed the breaking point. The massive inventory drawdowns that follow will jolt the market awake. I suspect that only when financial market participants see actual physical crude shortages occurring will they realize this supply disruption is not an illusion. Until then, most will be unable to accept this reality.

That's just the way it is.

If the Strait of Hormuz reopens after April, we will no longer be able to provide an accurate oil price forecast. Because by then, the market will have crossed a line of no return. This would become the largest supply disruption in oil market history, roughly four times the size of previous records. In such a scenario, traditional fundamental pricing theories lose meaning because "absolute shortage" cannot be measured by price. Once a market has no fuel available, it is simply "out of supply."

At what price will that last marginal barrel trade? I don't know, and I don't think anyone is clever enough to know the answer.

But what I do know is that demand destruction will come. For those watching oil, what will truly "kill" demand will be policy announcements. To balance a global supply disruption of about 11 to 13 million barrels per day, demand must fall by an amount equivalent to the pandemic lockdowns.

And even in such an extreme scenario, the market would only be barely "balanced," not shifting into surplus. But at least it would cushion the price shock. At that point, analysts like me, the "barrel counters," could identify when a true fundamental inflection point arrives.

So, to summarize in a few sentences: If the Strait of Hormuz remains closed beyond April, I don't know how high prices will go, but it certainly won't be $95 per barrel. Policy-led demand destruction will rebalance the oil market, but only to prevent inventories from deteriorating further.

We have established a set of market signals to monitor when this turning point arrives.

Conclusion

The oil market's breaking point has arrived. Global onshore crude inventories will plummet, and the pace of decline will be faster than ever seen before. U.S. crude inventories are the last to begin falling, and we will see this in next week's EIA inventory report. Once the market亲眼 sees onshore inventories clearly declining, prices will soon make another leap.

If the Strait of Hormuz remains closed beyond the end of April, no one can tell you where the price top is. The market will have completely crossed that line by then. The only way to rebalance oil prices will be through demand destruction. Therefore, instead of obsessing over "how high will prices go," it's better to track the truly critical market signals.

But if there's only one takeaway from this article, it is this: The oil market absolutely cannot rebalance at $95 per barrel. Prices must rise enough to offset a supply disruption of about 11 to 13 million barrels per day. Governments will have to implement mandatory demand compression policies, similar to the pandemic era, to suppress demand. Even then, it would only offset the supply gap, not push the oil market back into surplus. From a geopolitical perspective, I fear the situation has entered a "worse before it gets better" phase, as neither the U.S. nor Iran appears willing to back down.

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