The cushion is about to run out! Morgan Stanley: The crude oil market has entered a phase of actual supply disruption—on a scale several times larger than in 2022.

Europe’s jet fuel problem has not been resolved—it has merely been postponed. Cargo loaded prior to the blockade can only sustain a brief, superficial stability; once these in-transit shipments are exhausted, genuine supply tightening will officially begin. Even with European refineries operating at full capacity and adjusting their output mix, the incremental jet fuel production remains far insufficient to replace the volumes previously imported from east of the Suez. Naphtha represents another pressure point underestimated by the market. Even though steam cracker demand has been significantly curtailed, Asia still faces an evident supply deficit in April. Isolated cargo movements should not be prematurely interpreted as signals of market normalization. The shock spreads westward: The Atlantic Basin has shifted from a “buffer pool” to “the last barrel.” The most critical structural shift in the market over the past week is that shortages east of the Suez are now being “exported” into the Brent-linked market. Asian buyers are aggressively purchasing alternative supplies from the Atlantic Basin at an unprecedented scale, while Europe is being squeezed to the bottom of the supply competition queue. Price signals are already unmistakably clear: Dated Brent closed last Friday at USD 120.50 per barrel; Brent DFL (spot premium) surged to a record high of USD 10.31 per barrel; and the front-month Brent futures calendar spread widened to USD 7.25 per barrel. Disruption in the tanker market is equally striking. Currently, 33 Very Large Crude Carriers (VLCCs) are waiting at anchor off Yanbu; another 18 empty VLCCs are en route to the Red Sea; and at least 60 empty VLCCs located east of the Suez have signaled destinations in the Atlantic Basin. Meanwhile, Asian buyers are even deploying Panamax and Suezmax vessels to circumnavigate the Panama Canal—solely to accelerate cargo arrival times. This is not an optimization measure but an emergency response, directly reflecting the severity of the spot shortage. Reopening ≠ Normalization: Iraq’s production recovery faces substantive bottlenecks Morgan Stanley specifically cautions that markets tend to assume suppressed Gulf production is largely “deferred” rather than “lost”—a view that holds true only to a limited extent. The longer the shutdown persists, the higher the risk that some “deferred output” becomes “permanent capacity loss.” Iraq is the quintessential case. Following the reopening of the Strait of Hormuz, the country may struggle to rapidly restore its pre-conflict output of approximately 1 million barrels per day (mb/d). The Rumaila field is the weakest link: prolonged shutdowns have led to reservoir pressure depletion, risks of natural-flow well failure, and rising water cut in electric submersible pump (ESP) wells—all of which necessitate well intervention work, resulting in slower-than-expected restart timelines. Moreover, southern Iraqi storage tank capacity has long operated near saturation; certain fields cannot resume operations without first drawing down inventories. More critically, the Al Basrah Oil Terminal’s capacity has fallen below historical norms, and the fragility of its underwater pipelines and other supporting infrastructure is well documented. A rushed restart would force large volumes of fluid through aging, high-pressure networks—raising non-negligible risks of leaks and unplanned shutdowns. If Iran retains control over the Strait, the oil market may face a permanent rule change Morgan Stanley believes that if the conflict concludes with Iran retaining enduring control over the Strait of Hormuz, the global oil market will be unable to revert to its pre-crisis equilibrium. Morgan Stanley outlines four structural implications: First, average export volumes will remain persistently below pre-crisis levels. As long as transit uncertainty lingers, commercial buyers, shipowners, and insurers will price this risk across the entire supply chain—leading to fewer voyages, slower flow recovery, and higher operational inventory requirements.

Morgan Stanley’s March 16 conference call—The crude oil shock is underestimated; oil prices could surge to USD 110–150 per barrel; LNG and fertilizer supply chains trigger a dual ‘technology + food’ stress in Asia; China could leverage imported inflation to break deflation.

On the technology supply chain front, the market widely regards semiconductors as a “low-energy-intensity industry”—a notion explicitly labeled a “false premise.” In reality, AI and advanced manufacturing are highly electricity-dependent; wafer fabs and lithography tools alike constitute “electricity-intensive assets.” Asia’s key manufacturing hubs—Taiwan, South Korea, and Japan—rely heavily on imported liquefied natural gas (LNG) for power generation. Current LNG inventories in these economies typically cover only 6–15 days of demand. Should the Strait of Hormuz disruption interrupt LNG supplies from Qatar and other Middle Eastern exporters, electricity supply would be directly compromised—posing risks of semiconductor production load reductions or even complete shutdowns. Simultaneously, sulfur—a key chemical feedstock for chip manufacturing, derived as a byproduct of refining—will see sharply escalating costs due to energy-chain disruptions. On the food supply chain front, Morgan Stanley’s Investment Strategy team highlights significant lag effects. Over the past ~20 days since escalation began, international oil prices and Middle Eastern urea prices have risen roughly 50%, yet food prices have increased by only ~6%. This gap stems from the multi-month lag inherent in agricultural production cycles—cost pressures will gradually transmit to end consumers over time. Asia is especially vulnerable in this round of shocks: Food accounts for approximately 25% of CPI weights (one-quarter), versus just ~13% in the U.S. and ~14% in the eurozone. Moreover, the Middle East supplies over 20% of global fertilizers (e.g., urea, ammonia); India, Malaysia, and others hold only ~30 days of fertilizer inventory. Supply interruptions could therefore trigger systemic risks of crop yield declines. Overall, India, the Philippines, Thailand, Indonesia, and other LNG-dependent economies will simultaneously confront dual energy-and-food shocks. Their central banks may face difficult trade-offs between growth and inflation, entering a stagflationary pressure zone. III. Policy Divergence: The Fed “Tolerates Inflation,” While China May Leverage It to Break Deflation On policy responses, Morgan Stanley’s Investment Strategy team expects pronounced divergence among major economies. For the U.S., the Federal Reserve is expected to “see through the supply shock,” treating oil-price increases as exogenous and refraining from hiking rates in response. Although inflation expectations are rising, growth deceleration is equally evident; thus, the policy path remains inclined toward holding steady—or even cutting rates once this year—to prioritize growth protection. For China, Morgan Stanley’s Investment Strategy team notes that deflationary pressures persist, and externally driven inflation may instead present a policy opportunity. Drawing lessons from Japan’s experience since 2021—and China’s own practice in 2021, when commodity price surges and power shortages did not prompt monetary tightening but instead prompted reserve requirement ratio (RRR) cuts and other accommodative measures—the current scenario may invite a “go-with-the-flow” strategy. Under such circumstances, China could deploy fiscal stimulus alongside moderately accommodative monetary policy to channel imported cost-push pressures into final demand, thereby lifting wage and price expectations and breaking the deflationary spiral. Given constraints on bank net interest margins and financial stability, room for rate cuts is limited; instead, policymakers are more likely to pursue coordinated, multi-tool interventions. Regarding exchange rates, Morgan Stanley’s Investment Strategy team observes that the recent RMB appreciation reflected primarily dollar weakness and market expectations—not active policy guidance.

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Asia’s Buffers Too Thin to Keep Absorbing Oil Shock: World Bank

Asia’s Buffers Too Thin to Keep Absorbing Oil Shock: World Bank

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