Hormuz Buffer Is Running Out and the Market Has Not Priced It

Hormuz Buffer Is Running Out and the Market Has Not Priced It LNG tankers still skirt the strait, Gulf crude losses near 13 million b/d, and Morgan Stanley says the arithmetic is running out of time. LNG vessels are continuing to avoid the Strait of Hormuz, analysts told Montel, citing fears that the "fragile" US-Iranian ceasefire could collapse and leave ships caught in the crossfire. Obtaining insurance for Hormuz transits has become "trickier," the analysts added. The strait is not closed, but it is effectively closed for anyone unwilling to test the ceasefire's durability.¹ That matters because the disruption has already moved well beyond a shipping inconvenience. Gulf crude and liquids losses are now estimated at close to 13 million barrels per day, a shift Morgan Stanley describes as a full production shock rather than a flow interruption.⁴ Oil prices have not reflected that number. Despite the loss of nearly 1 billion barrels since the crisis began, futures have failed to exceed the peaks seen in 2022. The reason, Morgan Stanley analysts including Martijn Rats wrote in a note, is that the market entered the crisis with inventory buffers and investors kept expecting the strait to reopen.³ The arithmetic behind that price restraint is now explicit. A 3.8 million barrel-a-day increase in US exports, combined with a 5.5 million barrel-a-day reduction in Chinese imports, has effectively shielded the rest of the world from 9.3 million barrels a day of tightness. "A very significant amount," the analysts noted.³ The catch is that this offset depends on both legs holding simultaneously. China's import reduction has drawn down its own strategic and commercial inventories, which are finite. The US export surge requires sustained production and spare logistics capacity. Morgan Stanley's "race against time" framing is precise: if the strait stays closed into June, those cushions erode and the math changes.³ On the demand side, the picture is more complex than headline Chinese import figures suggest. A Bloomberg Surveillance guest noted on May 21 that the market is now "extremely underbought," and argued that when buyers do return to the market, the pickup in prices will be material, with the potential for an overshoot to the upside. The point is not that demand has collapsed permanently; it is that deferred purchases create a coiled rebound.⁶ China's position adds a layer that pure supply-demand arithmetic misses. Beijing's concern about energy security extends well beyond Hormuz. Its coast is surrounded by archipelagic nations, and Chinese officials have voiced explicit concern about the United States potentially controlling or blockading regional shipping lanes, according to The Economist. Taiwan, which produces roughly 90% of the world's most advanced semiconductors, sits at the centre of that geography.² Russia and China have both moved to exploit the disruption. Russia has released around 360,000 barrels of fuel to Vietnam and the Philippines, Bloomberg data show — a modest volume but a deliberate positioning move in Southeast Asian markets where US influence is contested.⁵ For traders, the structural question is whether the current price level reflects a strait-reopens scenario or a strait-stays-closed scenario. Futures pricing suggests the former remains consensus. The problem is that consensus has now been sustained for long enough that the inventory and export buffers it depended on are measurably smaller than they were when the crisis began. The unresolved risk is sequence and timing. If the ceasefire holds and Hormuz reopens cleanly, the deferred Chinese purchases absorb gradually and the overshoot risk is manageable. If it breaks, or if it simply drags through June without resolution, the 9.3 million barrel-a-day offset disappears faster than the market appears to have priced. The next signal to watch is whether LNG insurers move to formally exclude Hormuz transits — that would shift the calculus from a routing inconvenience to a structural pricing event.^3,1