Ramifications of the Iran War on Oil Prices

The oil market has just passed its breaking point. And it doesn’t matter if the Strait of Hormuz opens today.
Here’s why the damage is already done
There are approximately 160 million barrels or floating storage in tankers that will rush to exit the strait of hormuz .All these tankers take roughly 30-40 days to transit and unload the oil and an additional 20 days to return.

There are currently around 70 VLCC's headed towards the US to load US crude which will then head towards Asia . These VLCC's which carry around 2 million barrels of oil will take 6-8 weeks to load this crude. The transit time for the VLCC's is then another 40-50 days . Offloading this cargo and transiting through the strait of hormuz , will take another 20-25 days . This means that any VLCCs rerouted to the US need 3+ months to return .

There are currently 600 million barrels in onshore oil storage . Around 200 million barrels of this storage has to be drained to give enough cushion to producers to restart production.
. To fix this build up, it would require around 100 VLCC's .

Based on current tanker activity , this would not be physically possible till mid to Late june - at the earliest.

Once the onshore crude storage drains, there would be a need of a steady flow of tankers / VLCCs transiting through the Strait of Hormuz to pick up crude. At this point, producers like Saudi, UAE, Kuwait, Qatar, Iraq, and Bahrain can restart. This process can take a few more weeks but guaranteeing that the lack of supply continues.

According to rough estimates - Due to the strait closure the cumulative storage lost approximately 1 billion bbls. Based on calculations , this would increase to 1.2 billion bbls by the end of April, 1.59 billion bbls by the end of May, and 1.98 billion bbls by the end of June.

There just isnt enough crude oil available commercially to fix this supply loss . This is 4x larger than any supply outage in history. There is no playbook for this . Fundamental market theories will no longer apply because there’s no price for outright shortages.

The cycle that is currently playing out right now:

1. Crude prices go up
2. Refining margins are compressed
3. Refining product output is lower
4. Product storage draws
5. Higher margins again
6. Higher throughput
7. Crude prices go up again
   Rinse. Repeat. Until something breaks.

By end of July, US commercial crude storage could potentially fall below 400M bbls — perilously close to the operational minimum. At that stage , the Trump administration would be staring at a binary choice : Ban on all crude exports Or watch US refineries shut down due to the losses accumulated on refining margins . Neither of these options is good for crude markets.

The only option that “balances” this anomaly in the market now is demand destruction on the scale witnessed during state enforced COVID lockdowns.
Not lower prices. Not diplomacy.
Government mandates forcing people to use less fuel.
That’s will be the simple math. Crude selling at 95 $ is not the answer to this.

The last marginal barrel — the one that keeps a refinery running vs. shutting down —
What does it trade for? Nobody can come to a number . Prices will have to reach a level high enough to offset ~11 to ~13 million b/d of supply outage.

And that’s the most terrifying thing about this crisis.