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The Macro Brief – Containers and crude
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With the US and Iran reportedly edging towards a deal, Kim Fustier and Shanella Rajanayagam consider the implications of the conflict on oil prices and global trade.
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Transcript
Introduction to HSBC Investment Insights
00:00:05
Speaker
This is the macro brief from HSBC Global Investment Research, where we look at the issues driving financial markets across the world.
Escalating Conflict in Iran
00:00:12
Speaker
It's been more than two months since the conflict in Iran escalated, and market hopes are high that progress is being made towards a resolution.
00:00:20
Speaker
But as we speak on Thursday morning, the Strait of Hormuz remains effectively closed, causing continued turmoil for energy markets and the shipping industry.
Impact on Oil Markets and Global Trade
00:00:30
Speaker
On today's podcast, we're going to be looking at what the disruption has meant for oil markets and global trade and discuss where we could go from here.
00:00:38
Speaker
To do this, I'm joined by Kim Fustia, Senior Global Oil and Gas Analyst, and Shanela Rajanagam, Trade Economist. Kim and Shanela, great to have you both back on the podcast. Thanks, Piers. Great to be here.
00:00:49
Speaker
Kim, if we can start ah with you, in the last 10 days, I just looked at this before the start of this podcast, the price of Brent, or at least the one that we see on the screens, has hit a high of $126 per barrel and a low of $96, and is currently trading close to that level on renewed hopes of an end to the war. So understandably, in your latest update, you've looked at scenarios. Let's assume that a peace deal is imminent. What's likely to happen to the oil price and how long will it take to get back to, inverted commas, normal situation?
Oil Price Forecasts and Market Recovery
00:01:21
Speaker
So we published our latest update this week and we actually raised our Brent price forecasts to 95 for this year on average. Previously was it was 80. And precisely because we think the path back to normal is slower than the market has been assuming. So our base case is now that Hormuz traffic and Gulf output begin to gradually restart from mid-June, about a month from now.
00:01:41
Speaker
with a return to near normal flows by the end of the third quarter. So even if there was a deal announced in the next few days, the physical restart sequence takes time. You've got loaded tankers stranded in the Gulf that need to exit the strait, then empty tankers need to return, upstream oil and gas fields need to restart, and then the cargoes take another month or so to reach their final destination. So all of that takes time.
00:02:04
Speaker
Recent company commentary has actually been relatively reassuring here. We think some oil fields could take days or weeks to restart rather than months, and maritime insurance could potentially also return faster than we had initially feared.
Oil Supply Challenges and Energy Shortages
00:02:17
Speaker
But it's really about the whole system rather than a single asset, right? You've got 10,000 wells shut in in the Gulf right now.
00:02:24
Speaker
So on prices, the sharp sell-off that we saw this week to now just under $100 a barrel really illustrates the risk of headline-driven overshoots to the downside. And we've seen a few of those in the past month.
00:02:37
Speaker
So in our base case, the path down is really quite gradual because of everything I just explained. And the long-term anchor has also risen to $75 because you've got bigger inventory dollars today that mean a more challenging restocking cycle post-Hormuz reopening.
00:02:54
Speaker
So given the setbacks that we have already seen in trying to and achieve an an off-ramp to the conflict, we obviously need to look at your bad and pessimistic scenarios where the issue becomes one of inventories, or should I say dwindling inventories. How close are some countries to having to introduce measures to cut back on consumption?
00:03:13
Speaker
Yeah, I think the inventory picture is is really interesting and it's deteriorating a lot faster than people appreciate. So we estimate global inventories could fall by hundreds of millions of barrels ah between March and say June and that they would fall to more than a decade low. So at at the peak of the disruption, we estimate a net global drawdown of seven to eight million barrels a day. Now that's completely unheard of.
00:03:35
Speaker
Some of that would come from onshore commercial inventories and the rest would be floating storage and strategic reserve releases, etc. So really trying to use the whole system to plug a very large gap. But on rationing specifically, yeah, it's already happening, actually. You've got work from home mandates in several Asian countries, Bangladesh, Pakistan, the Philippines. India has diverted LPG use, and that's liquefied petroleum gas, away from industrial usage towards residential users.
00:04:02
Speaker
You've got purchase limits at the pump already in place in countries like South Africa and Australia. And those are all discretionary measures ahead of outright shortages, but they're real and they're starting. So we think the system will face stress well before tanks reach so-called operational minimums.
00:04:19
Speaker
And the trigger is going to be things like operational frictions. You know, refineries run out of crude and then they have to shut down. Things like these will start to happen. In terms of products, it's really ah middle distillates or diesel and jet fuel that face the biggest risk of shortages.
Long-term Impacts and Energy Transition
00:04:34
Speaker
In our bad scenario, frankly, things get even worse, right? In our bad scenario, you've got a deal reached in late summer um and the physical markets would stay tight right through the peak summer demand season. And so you would see even even worse shortages.
00:04:47
Speaker
So in terms of the longer term consequences of this latest conflict, do you think you've seen signs of some permanent demand destruction to oil and related products? I mean, we've seen the headlines of people showing a renewed interest to alternative energy sources. Is that temporary or are we seeing a structural shift because people then worry further down the line that there may be other geopolitical situations?
00:05:10
Speaker
Yeah, I think the market is is going to think of this as as a permanent change in in the risks around Middle East Gulf barrels, right? Now that we know that Hormuz can be shut relatively easily, people will put a risk premium over the supply coming from the region. It's nearly 20% of world oil production and about the same thing for LNG. I think people continue to underappreciate how long the physical recovery will take. And I've talked about you know the physical process of restarting flows, but there's also physical damage to some assets in the region, you know across LNG, across refineries, et cetera. The other thing people don't necessarily appreciate is that countries and companies will require restocking.
00:05:49
Speaker
You know, we we we won't want to live like this with the risk of not having enough jet fuel inventories in Europe or not enough diesel stocks to run mines in Australia, right? So there's going to be a whole lot of restocking taking place after Hormuz reopening.
00:06:05
Speaker
And the IAEA has estimated that rebuilding depleted reserves, frankly, could take right through to 2028. So that refilling cycle is going to provide, we think, a sustained floor under prices and margins. And and to your question on are we going to see permanent demand destruction,
00:06:21
Speaker
I do think that some structural demand loss is likely across petrochemicals, you know maybe some more recycling will be will take place, maybe some you know lower plastics demand, also aviation, gasoline with displacement by EVs and biofuels, especially in Asia and Latin America.
00:06:39
Speaker
This is all obviously very different from what happened in the 70s when the oil shocks then led to oil being driven out of power generation, but this time around the remaining oil users are far harder to displace.
00:06:52
Speaker
It's a little early to say whether, you know, how positive this is all going to be. I mean, electrification, fuel switching, efficiencies are all good things. But then if you look back to the 2022 industrial gas demand was permanently destroyed because of lower industrial activity. Now, that's not a good thing. So obviously, we'll be monitoring this very closely and see how it
Global Trade Resilience and Policy Adjustments
00:07:11
Speaker
unfolds.
00:07:11
Speaker
So let's switch to trade. Shanela, if we look back at 2025, one of the surprises was that despite the tariff announcements by President Trump on Liberation Day, global trade continued to experience growth, highlighting the resilience and adaptability of corporates to these challenges. Is the closure of the Strait of Hormuz likely to have more of an impact?
00:07:32
Speaker
That's right. So global trade actually started this year on quite a strong footing. According to the World Trade Organization, global goods trade growth was about 4.6% last year. And they are expecting a bit of a moderation this year anyway, down to about 1.9% growth, mainly as some of that front-loading story ahead of the US tariffs last year drops away. and There was also very strong AI growth ah last year. ah But of course the closure of the Strait of Hormuz presents severe downside risks to this forecast. And actually the WTO expect that it could take about 0.5 percentage points off ah that trade growth forecast for this year.
00:08:12
Speaker
and it's not just goods trade that would be affected. Services trade as well ah could see a bit of a downside risk, particularly to all the disruption ah to international travel and transportation.
00:08:24
Speaker
So do you think that, so similarly to to my question to Kim, do you think that there's likely to be some longer term effects to this disruption? Are corporates going to look to rebalance some of their trade routes, for example?
00:08:36
Speaker
Yeah, so that's ah basically the question of the moment. And it completely depends on how long the straight-up home moves remains effectively closed. I think the sense at the moment from businesses is that it's relatively temporary, but of course, you know, that's not kind of bedded in as fact. ah But also it's very difficult to find alternative routes for some of the products that are frequently traded via the Strait of Hormuz.
00:09:01
Speaker
ah Oil trade, LNG trade, even fertilizer trade. And so what we are seeing at the moment is that ah certain economies are implementing trade policy measures, either export bans, some relief on import tariffs to basically secure and protect some of ah their domestic supply.
00:09:20
Speaker
ah So you know coming back to your original question, completely depends on when exactly ah the strait will reopen. At the moment, we are seeing quite flow-on effect into tanker rates, but also into air cargo rates as well. um So even though you know some alternative routes are available, it is still affecting ah freight and shipping rates.
00:09:43
Speaker
What else should we be focusing on when it comes to global trade? I mean, it's kind of crazy to think that because of the conflict in Iran, we've sort of completely put aside tariffs. And in fact, there was a Supreme Court ruling that invalidated a number of the tariffs that President Trump had tried to introduce. Where are we with that? I know that they are looking at alternatives.
00:10:03
Speaker
That's right. So we cannot forget about US tariffs. And actually at the moment, because of the invalidation by the Supreme Court of the IEPA tariffs, at the moment a Section 122 tariff is currently in place. That's 10% across the board on imports from all countries. Now that is a temporary duty that's set to expire on the 24th of July. And the big question in the trade world is what exactly will replace that regime? And the Trump administration is working to put in place a more durable tariff regime, as something that might be less likely to be challenged legally. They've launched a bunch of Section 301 investigations, basically covering imports from all trading partners, and with the hopes that that regime will be in place after 24th of July. It remains to be seen exactly what form that will take, for example, what products might be targeted or what exactly the precise tariff rates will be. So there's still plenty of uncertainty around US tariff policy.
Conclusion and Future Resources
00:11:08
Speaker
And there are some developments in the UK that are worth highlighting. That's right, so for UK businesses, watch out for Mexico ah having ratified the UK's access accession to the CPTPP trade deal. So that means UK corporates will be able to trade into Mexico on those favourable terms by the end of June. Canada is also on the cusp of ratifying ah the UK's accession to the deal. And of course, there's the UK-EU summit that's due to take place within the next couple of months.
00:11:38
Speaker
So watch out for those headlines. That's all we have time for today. Again, best of luck in managing these volatile times. But thank you for joining me today. Thank you. Thank you.
00:11:52
Speaker
That was Kim Fusje and Shanela Rajanagam on the outlook for oil prices and global trade. A reminder that you can keep up to date on all our latest reports, videos and podcasts by downloading our app from Apple's App Store and Google Play.
00:12:06
Speaker
And whilst you're there, check out our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde put Asian economics and markets in context. And if you've got any questions or comments, then you can get in touch with us at askresearch at hsbc.com.
00:12:22
Speaker
So that's a wrap. This week's Macrobrief was hosted by me, Piers Butler, and produced by Tom Barton. Please like and subscribe wherever you get your podcasts. Thanks so much for listening. We'll be back next week.