TD Securities’ Senior Commodity Strategist Ryan McKay warns that Oil markets face escalating tightness as flows through the Strait of Hormuz remain severely restricted and Gulf production cuts exceed 10m b/d. The report highlights rapidly eroding floating storage, limited bypass capacity via Yanbu and Fujairah, and an underwhelming IEA/US SPR response, suggesting benchmark Oil prices are likely to move sharply higher without a swift reopening of Hormuz.

Benchmark prices seen moving sharply higher

“Flows of oil and products through the Strait of Hormuz remain ≈18m b/d below pre-war levels. While Iranian flows have continued unencumbered and the odd tanker has been able to transit the Strait with payment and coordination with Iran, the overall level of flows remains some -98% below pre-war levels.”

“Production reductions among Gulf producers has risen to over 10m b/d and may still increase with each passing day. Production declines will see at least 200m barrels of Middle East oil not produced by the end of the month. This level of production shut-in adds up extremely quickly, with the market now set to lose at least 70m barrels with each passing week.”

“Floating storage located outside the Middle East has fallen as much as 35% or 33m barrels since the start of this conflict. In Asia, the entire excess floating inventory above 5yr average has been eroded. With the floating storage buffer being quickly used up, onshore inventories will begin to feel pressure in the coming weeks without a resumption of flows.”

“The total IEA SPR release flow rate is estimated to near 3m b/d, which is lower than the market had hoped and not nearly large enough to offset the scale of the current supply loss. Furthermore, the first round of US SPR release only saw 45.2m out of 86m awarded. Due to the nature of the exchange, the curve and basis risk appears to have limited demand for the SPR barrels.”

“Beyond headline volatility, as long as the flow of barrels remains constrained, the situation will continue to worsen with each day as buffers become increasingly exhausted. Unless a deal leads to a swift resumption of flows, it is inevitable that benchmark prices will move sharply higher.”

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