Not a price increase, but a supply cutoff? Oil prices have already crossed the critical point

Title: (WCTW) The Oil Market Breaking Point Is Here
Author: HFI Research
Compiled by: Peggy, BlockBeats

Source:

Reprint: Mars Finance

Editor’s note: This article believes that the global oil market has already crossed the “critical point.” Moving forward, the issue is no longer whether oil prices will continue to rise, but how the supply gap in reality will passively manifest—whether through accelerated crude oil inventory depletion, shortages of refined products, or demand suppression via policy measures.

The core logic of the article is built on an underestimated variable: temporal mismatch. Even if the Strait of Hormuz resumes transit in the short term, the delays caused by earlier transportation disruptions will continue to erode onshore inventories over the coming weeks. This means that supply issues will not be immediately alleviated by “reopening,” but will lag and be reflected in inventories and spot markets.

In this context, refinery behavior becomes a key amplifier. The reduction in throughput at Asian and European refineries does not mean terminal demand is weakening simultaneously; instead, it will first deplete refined product inventories, push up fuel prices, and then force refineries to restart, creating a self-reinforcing cycle: high oil prices—profit compression—inventory depletion—profit recovery—load increase. This mechanism makes it difficult for the market to rebalance through conventional supply and demand adjustments in the short term.

A more impactful judgment is that once the Strait remains closed into April, the traditional oil pricing framework will break down. The market will no longer face cyclical price increases but will approach an “actual physical shortage” scenario—where prices are no longer effective as a regulatory tool, and the price ceiling loses its reference significance. The only way to truly restore market balance is not through supply recovery but through demand suppression similar to that during the pandemic period.

Therefore, $95 per barrel is far from enough to restore balance in the oil market. Under ongoing geopolitical tensions, what to watch in the future is not the oil price itself but inventory changes, policy signals, and the passive contraction of demand.

Below is the original text:

Please read the article “The Critical Point of the Oil Market.”

Related: “Oil Prices Approaching a Critical Point, What Will Happen in Mid-April?”

In our report published on March 25, we listed multiple scenarios and pointed out that the critical point of the oil market would occur in mid-April. But now, that critical point has passed.

From this moment, daily disruptions of 11 to 13 million barrels of supply will manifest in one of three ways:

1. Decline in crude oil inventories;
2. Decline in refined product inventories;
3. Demand destruction.

If you’re unfamiliar with the logistics mechanisms or logic involved, let me clarify.

The so-called “critical point” of the oil market refers to the last batch of crude oil shipped from the Persian Gulf to end users. Once these tankers complete unloading onshore and cannot continue unloading, onshore crude inventories will start to be depleted. (For more details on onshore inventory calculations, refer to our previous analysis articles.)

Currently, global refinery shutdowns exceed about 5 million barrels per day, with approximately 3 million barrels per day concentrated in the Middle East. Asian and European refineries are also reducing throughput, but refinery cuts do not mean terminal demand has decreased.

The decline in refinery throughput will accelerate the consumption of refined product inventories, pushing up fuel prices. This process will, in turn, improve refining margins, encouraging refineries to increase throughput again.

This cycle will repeat over the coming weeks: crude prices rise → refining margins compress → refined product supply decreases → inventories decline → refining margins recover → throughput increases → crude prices rise further.

In the spot market, this “game” will be played between traders holding inventories and refineries without inventories. Of course, this situation can only last until onshore crude inventories are exhausted, which is not far off.

By the first week of May, only Japan and China will have actual crude inventories remaining in Asia. Other countries will have to compete for spot crude oil in the market. If the Strait of Hormuz remains closed at that time, refineries will be willing to pay any price to acquire the needed crude—because the alternative is shutdown.

For Europe, crude shortages will also emerge within the same timeframe. At that point, U.S. crude exports will approach 5.5 million barrels per day, and OECD countries’ crude inventories will fall to the minimum operational levels, with remaining stocks mainly concentrated in the U.S.

We expect that by the end of July, U.S. commercial crude inventories will fall below approximately 400 million barrels and approach the operational minimum (around 370-380 million barrels). This estimate also includes the release of about 139 million barrels of Strategic Petroleum Reserve (SPR).

In the near future, the Trump administration is likely to impose restrictions on both crude oil and refined product exports. We judge that the Trump administration will probably first restrict refined product exports; if profit margins are squeezed and U.S. refineries start to cut throughput, then further restrictions on crude exports may follow—this would be an extremely bad scenario for U.S. shale oil and Canadian oil producers (we will elaborate in subsequent analyses).

It is important to emphasize that all these changes will occur regardless of whether the Strait of Hormuz reopens. Even if the U.S. and Iran reach an agreement and restore unrestricted passage through the Strait, the depletion of onshore inventories will still be unavoidable.

Let me explain the logic again:

Suppose by this Tuesday, a ceasefire ends and a long-term peace agreement is reached.

Currently, floating inventories on ships amount to about 160 million barrels, which will quickly start unloading. But it takes 30 to 40 days for these tankers to complete transportation and unloading; then, an additional 20 days for return voyages.

Meanwhile, about 70 Very Large Crude Carriers (VLCCs) are en route to the U.S. to load crude and ship to Asia. These ships take about 6 to 8 weeks to load, 45 to 50 days to reach Asia, and 20 to 25 days to unload and return through the Strait of Hormuz. In other words, this fleet will be unable to form effective return capacity for at least the next three months.

To alleviate the current onshore inventory backlog in the Middle East, at least 100 VLCCs are needed. Currently, onshore inventories are about 600 million barrels, and to restore production, inventories need to decrease by roughly 200 million barrels. But based on existing capacity, this physical reduction will likely only be feasible by mid to late June.

Once onshore inventories are gradually released, stable tanker flow through the Strait of Hormuz will be necessary for shipments. Only then can oil-producing countries like Saudi Arabia, UAE, Kuwait, Qatar, Iraq, and Bahrain gradually resume production. This process will take several weeks, almost ensuring that supply shortages will persist.

According to our estimates in the March 25 “Critical Point” report, the cumulative inventory loss caused by the Strait closure has already reached about 1 billion barrels; by the end of April, it will expand to 1.2 billion barrels; by the end of May, 1.59 billion barrels; and by the end of June, nearly 1.98 billion barrels.

There is not enough commercial crude in the market to fill such a large supply gap. Therefore, to avoid systemic imbalance, the only adjustment can be “demand destruction.”

This is not a matter of judgment but simple mathematics.

Geopolitical issues

I have never liked geopolitics—it’s full of uncertainties, no safety margins, filled with gray areas, and rarely clear-cut. But regarding Iran conflicts, the situation seems to be heading toward an “either-or” extreme.

My friend PauloMacro recently recommended I read Professor Robert Pape’s research, author of “Escalation Trap.” I have systematically studied his views over the past two months. He recently published an article titled “Why the Ceasefire Keeps Failing,” which is worth reading.

From my personal observation, everything that happened this weekend almost looks like scenes straight out of a horror movie.

Since the conflict erupted at the end of February, most oil tankers have been stationary, waiting. There was a view early on that the Strait of Hormuz was closed because insurance had failed. I initially agreed with that assessment, but as events unfolded—especially what happened this weekend—I was shocked.

The Iranian Revolutionary Guard Corps (IRGC) effectively implemented a blockade through force, directly threatening tankers with gunfire. We saw this clearly from tanker movements. Since we started tracking tanker activity, this is the first time we’ve seen such a large-scale collective turn-around. Occasionally, one or two tankers would change course, but never on this scale.

In my view, this signals two things: first, that the IRGC has firmly taken control of the Strait of Hormuz; second, that the conflict is likely to worsen further before it improves. Given the conditions proposed by IRGC and Iran, it’s almost impossible for the U.S. to accept, leaving very limited room for maneuver. To fundamentally resolve this issue, it probably requires a “real solution”—you know what I mean. I fear the worst is yet to come, and I say this not to scare but because I genuinely believe so.

Various Scenarios for the Oil Market

In our previous article discussing the “critical point” of the oil market, we pointed out that if the Strait of Hormuz reopens before the end of April, Brent crude could “drop back” to around $110 per barrel; but today, it trades at about $95.

But as I explained earlier, the market has already crossed the critical point. The upcoming large-scale inventory depletion will shock the market thoroughly. I suspect that only when financial market participants see the reality of actual crude shortages will they realize that this supply disruption is not a false alarm. Until then, most people will find it hard to accept this reality.

That’s just how it is.

If the Strait of Hormuz reopens after April, we will no longer be able to give accurate oil price forecasts because the market will have crossed an irreversible threshold. This will be the largest supply disruption in oil market history, roughly four times the previous record. In such a scenario, traditional fundamental pricing theories will lose meaning because “absolute shortages” cannot be measured by price. Once a market has no fuel available, it simply “shuts off.”

What price will the last marginal barrel of oil trade at? I don’t know, and I don’t think anyone is smart enough to know.

But what I do know is that demand destruction will definitely happen. For those paying attention to oil, what will truly “kill” demand will be policy announcements. To balance the approximately 11 to 13 million barrels of daily supply disruptions worldwide, demand must decline at a scale comparable to pandemic lockdowns.

Even in such extreme scenarios, the market will only just “balance” and will not turn into surplus. But at least it can ease price shocks. At that point, analysts like me—“number-of-barrels” advocates—will be able to judge when the real fundamental turning point occurs.

So, to sum up in a few words: if the Strait of Hormuz remains closed after April, I don’t know where oil prices will go, but it certainly won’t be $95 per barrel. Policy-driven demand destruction will rebalance the oil market but only to prevent inventories from deteriorating further.

We have established a market signal system to monitor when this turning point arrives.

Conclusion

The critical point of the oil market has arrived. Onshore global crude inventories will plummet sharply, and the speed of decline will be unprecedented. U.S. crude inventories are the last to start falling, and we will see this in next week’s EIA inventory report. Once the market sees a clear decline in onshore inventories, prices will quickly surge again.

If the Strait of Hormuz remains closed after the end of April, no one can tell you where the top of oil prices will be. By then, the market will have crossed that line completely. The only way to rebalance oil prices is through demand destruction. Therefore, rather than obsessing over “how high prices will go,” it’s better to track those truly critical market signals.

But if there’s only one takeaway from this article, it’s this: oil markets will never rebalance at $95 per barrel. Prices must rise enough to offset the daily supply disruptions of about 11 to 13 million barrels. Governments will have to implement mandatory demand compression policies similar to pandemic measures to suppress demand. Even then, it will only offset the supply gap, not push the market back into surplus. From a geopolitical perspective, I fear the situation has entered a phase of “worsening before improvement,” as neither the U.S. nor Iran seem willing to make concessions.