Thoughts on the Market
2026-07-30 · Hosted by Mike Wilson · Morgan Stanley
Executive Summary
Andrew Sheets, Morgan Stanley's Global Head of Fixed Income Research, spoke with Martijn Rats, Head of Commodity Research, about extreme volatility in oil markets over the past two months. Prices fell to $70 a barrel in mid-June after a memorandum of understanding briefly cleared a backlog of tankers stuck behind the Strait of Hormuz, but a resumed military conflict has since cut flows through the strait by 80-90%, pushing prices back up.
Key Stories & Changes
1. Oil Market Round-Trip: $70 to Renewed Highs in Six Weeks
Early June: excess tankers stuck behind the Strait of Hormuz cleared following a memorandum of understanding, creating a temporary supply glut
Brent crude fell to $70 a barrel as physical differentials and calendar spreads signaled looseness
Military conflict resumed with 13 days of overnight bombing, cutting Hormuz flow to roughly 2-3 million barrels a day, down 80-90% from pre-conflict levels
Prices have since rallied sharply, though a brief further escalation scare "for a couple of days" also got priced in before easing
2. Three Additional Choke Points Beyond Hormuz
Bab el-Mandeb strait: controlled by Houthi forces; threatens roughly 3.5 million barrels a day of Saudi crude that had been redirected via the East-West Pipeline to the Yanbu terminal after Hormuz became risky; Houthis have said they will no longer allow Saudi tankers to sail out and have conducted drone attacks on Saudi facilities including Jazan refinery, Yanbu terminal, and the Abqaiq processing plant
CPC terminal (near Novorossiysk, Russia): exports roughly 1.5-2 million barrels a day; subject to repeated Ukrainian drone attacks, described as "on again, off again"
Global refining tightness: roughly 60% of Russia's refining system is currently out due to Ukrainian drone strikes, alongside separately low Chinese refinery utilization
3. Refined Product Prices Signal Tighter Conditions Than Crude Alone
The ICE gas-oil (diesel) benchmark is trading around $1,200 a ton, equivalent to roughly $150-160 per barrel
Refiners are currently capturing $65-70 of that price, more than crude suppliers
Russia's gasoline and diesel export bans have taken Russian diesel exports to "practically zero"
Historical demand-destruction price for diesel is estimated around $1,400 a ton (roughly $180-190/barrel); current levels of $1,230-1,240 are "getting close," with perhaps another 5-10% before hitting exceptionally high levels
4. The "Billion-Barrel Problem": Missing Inventory Data
Cumulative Middle East supply loss since the conflict began: over 1.5 billion barrels over 150 days
Observable inventory draws account for only about a third of that (roughly 0.5 billion barrels)
Rats concluded the market's unobservable inventory buffers (supply chain, customer-end, and opaque markets like China) must be far larger than previously modeled, following an inverse pattern from 2024-2025 when analysts overestimated inventory builds
Trends Identified
1. Structural Shift From Single Choke Point to Multi-Front Supply Risk
The oil market's risk profile has evolved beyond the Strait of Hormuz alone to a four-front disruption scenario — Hormuz, Bab el-Mandeb, CPC, and refining capacity — meaning that even a resolution at one choke point would not necessarily restore market stability, since the others operate independently of the Iran conflict's core dynamics.
2. Refined Products, Not Crude, Are the Real Transmission Channel to the Economy
Sheets and Rats emphasized that end users (truckers, consumers) pay for diesel and gasoline, not crude oil directly, and that refined product prices are currently rallying more sharply than crude — meaning headline Brent prices may understate the actual economic pain being transmitted through the system.
3. Inventory Data Opacity Is Undermining Forecast Confidence
Rats's "billion-barrel problem" reflects a broader trend of analysts losing confidence in observable inventory data, having been wrong in both directions (overestimating builds in 2024-25, now underestimating available buffers in 2026) — a reminder that oil market forecasting carries wide uncertainty bands even with sophisticated modeling.
4. Winter Heating Demand Adds a Looming Deadline to the Supply Question
Rats flagged that European household heating-oil inventories are typically low this time of year and need rebuilding before winter, meaning that if current disruptions persist into August-September, the system could be "running on fumes" heading into a season of naturally rising demand. ---
Sentiment Analysis
Overall Market Sentiment: Constructive on Oil Prices, Highly Uncertain
Both speakers leaned toward a bullish (higher-price) bias for oil given the stacked disruptions, while repeatedly emphasizing how difficult the environment is to forecast with confidence.
Risk Factors Highlighted
Strait of Hormuz flow collapse: Down 80-90% from pre-conflict levels amid resumed military conflict, with no clear resolution timeline.
Bab el-Mandeb strait disruption: Houthi threats and drone attacks put roughly 3.5 million barrels a day of redirected Saudi crude at risk.
CPC terminal unreliability: Ukrainian drone attacks have made this 1.5-2 million barrel-a-day export terminal "on again, off again."
Russian refining capacity collapse: Roughly 60% of Russia's refining system is out, eliminating most Russian diesel and gasoline exports.
Diesel prices approaching demand-destruction levels: Current prices are within 5-10% of levels that historically trigger sharp declines in economic activity.
Unobservable inventory buffers may be smaller than assumed: The "billion-barrel problem" suggests genuine uncertainty about how much cushion remains in the global oil system.
Winter heating season deadline: European heating-oil inventories need rebuilding before winter, adding time pressure to an already tight refined-product market.
European growth vulnerability: Diesel-driven cost increases pose an outsized risk to European economic activity given an already weak growth starting point.
This episode was covered in today's [The Market Signal — 2026-07-30](https://marketsignal.beehiiv.com/p/the-market-signal-2026-07-30), a cross-source synthesis of multiple podcast reports.