Oil prices are approaching a critical point. What will happen in mid-April?

Original Title: (WCTW) The Oil Market Breaking Point
Original Author: HFI Research
Translation by: Peggy, BlockBeats

Editor's Note: This article argues that what truly drives oil prices is not just whether conflicts end, but "when the critical point is crossed."

In the nearly four-week-long conflict in Iran, the oil market is experiencing a typical "time pricing." The release of strategic reserves has delayed the impact but cannot eliminate the supply gap; disruptions in tanker transportation and delays in capacity recovery are continuously accumulating inventory pressure into the future. Once the critical point around mid-April is crossed, the price mechanism will shift from "buffered volatility" to "gap-driven repricing."

More importantly, the structure of the game itself is changing. The conflict no longer presents a path of "escalation to de-escalation," but rather shifts to a test of endurance against the market's critical point. Whoever can hold out until the supply-demand imbalance is priced by the market will hold the negotiating power. This means that even if the conflict ends in the short term, oil prices are unlikely to return to their previous range. The current supply losses are reshaping the global oil balance for the foreseeable future.

Here is the original text:

In this article, I will break down several possible scenarios that may arise. With the Iran conflict having lasted nearly four weeks, how will this situation affect the oil market?

On March 9, we published a public article titled "My Latest Judgment on the Oil and Gas Market Under the Iran Conflict," which stated:

Here are the impacts on oil prices under different scenarios ("loss of barrels" includes the time needed to restore capacity):

Scenario 1: Tanker transportation resumes the next day

→ The average price of Brent crude oil for the year will be in the range of $70 high to $80 low (approximately a loss of 210 million barrels)

Scenario 2: Tanker transportation resumes before March 15

→ The average price of Brent for the year will be in the mid-high $80 range (approximately a loss of 290 million barrels)

Scenario 3: Tanker transportation resumes before March 22

→ The average price of Brent for the year will be in the low $90 range (approximately a loss of 370 million barrels)

Scenario 4: Tanker transportation resumes before March 29

→ The average price of Brent for the year will be in the mid-high $90 range (approximately a loss of 450 million barrels)

If tanker transportation is still not restored by March 29, the situation the oil market will face is even too grim to imagine. The only way out will be a forced contraction in demand, pushing prices to extreme levels.

Shortly after the report was released, the International Energy Agency (IEA) announced the coordinated release of a total of 400 million barrels of global strategic oil reserves (SPR). This will alleviate the impact of supply losses to some extent. However, as we pointed out in our subsequent article "IEA's Coordinated Release of SPR, the Biggest Gift to Bulls":

From a trading perspective, traders will not rush to push oil prices higher until this "buffer" is exhausted. The concentrated release of SPR can indeed alleviate short-term supply anxiety, but this is only a temporary solution. The market will remain tense as long as tanker transportation has not returned to normal; oil prices will gradually rise.

On the other hand, if the situation quickly eases—such as an immediate ceasefire or agreement—oil prices will drop rapidly. For example, if a peace agreement is reached before March 15, global inventories will net increase by 110 million barrels (400 million barrels released - 290 million barrels lost).

This could push Brent prices back down to the mid-$70 range.

Conversely, if there is no peace agreement and supply disruptions continue until the end of March, global inventories will net decrease by 50 million barrels, and for each additional week, the gap will expand by approximately 80 million barrels.

Therefore, the role of SPR is merely to "buy time" and does not solve the core issue. Tanker transportation must return to normal. However, it does prevent a catastrophic price spike in the short term, thus averting a massive collapse in demand.

As time has progressed, we have now entered the "March 29 scenario" set at the beginning of the month. Next, we will assess the direction of the oil market based on the latest facts.

Facts

The total production cut from Saudi Arabia, the UAE, Kuwait, Iraq, and Bahrain has reached 10.98 million barrels per day:

Iraq: -3.6 million barrels per day

Kuwait: -2.35 million barrels per day

UAE: -1.8 million barrels per day

Saudi Arabia: -3.05 million barrels per day

Bahrain: -0.18 million barrels per day

Saudi Arabia has fully utilized its east-west oil pipeline capacity, currently exporting about 4 million barrels per day through the Red Sea. The UAE is also rerouting transportation through the Abu Dhabi pipeline (Habshan-Fujairah), which has also reached its capacity of about 1.8 million barrels per day. Tanker transportation through the Strait of Hormuz remains completely interrupted. In fact, even if the war ends tomorrow, it will take months to restore production and rebuild normal transportation.

Scenario Analysis

I will present three possible paths:

1. The war ends within this week, and transportation resumes by the weekend

2. The war ends in mid-April

3. The war ends at the end of April

It is important to note that the release of 400 million barrels of SPR has bought more time for the market compared to our initial judgment on March 9. The following oil price scenarios have taken this change into account.

Scenario 1: Ends This Week

Impact on global inventories: -50 million barrels (already accounted for SPR)

Impact on Brent: Short-term drop to low $80, average price for the year in mid-high $80 range

Scenario 2: Ends in Mid-April

Impact on global inventories: -210 million barrels

Impact on Brent: Short-term drop to low $90, average price for the year in mid-high $90 range

Scenario 3: Ends at the End of April

Impact on global inventories: -370 million barrels

Impact on Brent: Short-term spike to the $110 range, average price for the year in $110-$120 range

Key Turning Point: Mid-April

For the oil market, there is a clear "critical point." The current market generally expects the conflict to end before mid-April, and this expectation is crucial for oil price pricing.

Oil prices are a product of "marginal pricing." As long as the market believes that supply is still "barely sufficient," panic will not occur. The current state of the oil market is just that—lacking panic.

The Trump administration's policy statements, the easing of sanctions on Iranian and Russian oil, and the release of SPR have collectively suppressed oil prices.

However, once this critical point is crossed, these factors will become ineffective.

Currently, the evaporation effect of "crude oil in transit" has not yet truly transmitted to onshore inventories. But our judgment is that by mid-April, this impact will be fully evident.

If the conflict is not resolved before mid-April, the International Energy Agency (IEA) will have to coordinate the release of approximately 400 million barrels of strategic oil reserves (SPR) again. Otherwise, oil prices will surge into the "demand destruction" range (above $200).

Long-term Impact

In Energy Aspect's latest weekly report, it estimates that the cumulative supply loss in the market is approximately 930 million barrels. Among them, the cumulative production loss from May to December is about 340 million barrels.

This judgment is clearly more aggressive than ours. In our inventory sensitivity analysis, we did not fully consider the reality that countries like Iraq and Kuwait may take 3 to 4 months to restore capacity. This means that our previous estimates may have been overly conservative.

For Goldman Sachs, the conclusion is straightforward: the longer the conflict lasts, the longer high oil prices will be maintained.

In the scenarios mentioned above, Goldman Sachs also provided a hypothesis: what the market would look like if the conflict lasts another 10 weeks. Its judgment is basically consistent with our previous analysis.

Essentially, there is a "critical point" in the oil market. Once this line is crossed, there is no turning back.

Readers need to prepare for the expectation that future oil prices will show a structural increase. Even if the war ends within this week, the supply losses that have already occurred will have a substantial impact on the future global oil supply-demand balance.

How Long Will It Last?

So far, I have avoided making judgments about "when this conflict will end." On one hand, I do not want to "set a flag," and on the other hand, I truly cannot predict.

But one thing is clear: this time is different from past conflicts. What was often seen in the past was a strategy of "escalate to de-escalate," and now there are hardly any signs of such.

Retaliatory strikes occur without warning; Iran's strike range seems no longer limited to Israel but has expanded to Gulf countries. It is this reaction that made me realize from the beginning—this time, the situation is different.

As the conflict has lasted nearly four weeks, I am increasingly worried: with no agreement in sight, the longer it drags on, the significantly lower the probability of reaching an agreement becomes. As we analyzed in the article "Time is Running Out," Iran is very clear about the operational logic of the oil market. It only needs to wait for the market to reach that "critical point" to negotiate the maximum concessions from the U.S. From a tactical perspective, reaching an agreement at this time offers no advantage to it. The card of the Strait of Hormuz has already been played and is unlikely to be reused in the future.

For Gulf countries, if the current Iranian regime is not overthrown, this "strangulation" situation will repeatedly occur in the future. Even if some sort of "toll" mechanism is established, this uncertainty remains unacceptable.

Therefore, logically, the initiative is not in the hands of the U.S., but on the Iranian side. In this case, Iran is more motivated to push the situation toward the oil market's "critical point" to test the U.S.'s tolerance. All it needs to do is to "hold on" for another three weeks until the market begins to show cracks.

But it should be emphasized that I am not a geopolitical expert, and I do not have complete confidence in such judgments. What I can provide is merely a current situation assessment based on fundamental analysis.