PremiumWhat If The Strait Of Hormuz Never Fully Reopens
Brent has fallen by $20/bbl since mid-May on peace deal hopes, but it remains unclear if an agreement will lead to a full, unconditional Hormuz reopening. In fact, it appears that both sides to the conflict believe time is on their side and they are delaying a reopening as leverage. According to a new report by HSBC (available to pro subs), the debate needs to shift from when the Strait “reopens” to the shape of the recovery, including what a plausible “new normal” looks like if transit remains administered. Here are some of the highlights from the report:
- A partial reopening implies market deficit for longer: Third-party scenarios imply sub-normal Hormuz flows for longer if the Strait is neither fully closed nor fully open: Kpler’s “Iranian control” case stabilises at c45% of pre-war traffic by end-2027. Industry behavior suggests that a selective clearance regime is potentially becoming institutionalized. In such an outcome, the oil market deficit would persist even after a ceasefire and well into 2027, keeping the forward curve tighter than current pricing (in the high $70s) implies. Prices may need to stay in the triple digits to force enough demand destruction if Hormuz traffic does not recover to at least 60% of normal.
- Gulf bypass pipeline infrastructure is likely to become structural and is being expanded. Saudi’s East-West has been fully utilized since March, while the UAE’s ADCOP line to Fujairah is being doubled to >3mbd by 2027. Assuming Hormuz flows recovering to ~14mbd (70-75% of pre-conflict levels), combined with full bypass utilization including the ADCOP expansion, would restore the bulk of Middle East crude exports, though this does not solve products or LNG constraints.
- HSBC's updated “bridge” maths suggests the net disruption is still ~13mbd (with lower Iranian exports offset by an uptick in non-Iranian flows), translating into ~7mbd stock draws after demand destruction and the pre-war surplus, of which 3mbd is visible commercial onshore stocks. HSBC expects global stocks to fall from 8bn bbls in April to 7.5/7.4bn in June/July, with the path thereafter hinging on whether reopening is full or partial rather than simply early or late.
- Inventory draws could extend past summer. HSBC does not subscribe to the narrative that “tank bottoms” are just weeks away. True, inventories are falling quickly, but it could be several months before storage hits operational minimums. In the US, where stock draws are most visible, reaching the bottom of the five-year range by late June or July alone does not signal a crunch yet. The bank's estimates suggest that tank bottoms may not be reached before October (in the US) or December (globally).