Episode Details

Despite the historical energy disruption from the Iran conflict, stocks are back to record highs. Our Global Head of Fixed Income Research Andrew Sheets and our Head of Commodity Research Martijn Rats discuss different views and fundamentals driving markets.

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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Martijn Rats: I'm Martijn Rats, Head of Commodity Research at Morgan Stanley.

Andrew Sheets: Today: oil, oil inventories, and the price at the pump.

It's Wednesday, May 6th, at 2pm in London.

Martijn, it's great to talk to you. We remain in this very unique market where on the one hand, the energy market is severely disrupted. On the other hand, we're making new all-time highs in the stock market. And part of this debate is a creeping sense that maybe the energy market is just a lot more resilient than many people initially thought.

So, let's just jump right into it. As you look at the current state of the world, the state of things, how are you seeing the energy market at the moment?

Martijn Rats: There are definitely two views in the market. I would say commodity specialists, oil traders, people that trade oil and gas equities for a living, tend to focus on the size of the supply shock. And it is neither hyperbole nor disputed that the size of the supply shock is the largest in the history of the oil market. We have the statistical data to back that up. That is not a controversial statement.

But at the same time, the other view in the market, generally held by your generalist investors who invest across many markets. They tend to focus on the likelihood or possibility that this supply shock might also be uniquely short. It was there all of a sudden, from one day to the next, the strait was closed. It felt a bit man-made, so to say. It was an outcome of a political decision, and that can also be undecided. And so, this is – the to-ing and fro-ing in the market is; on the one hand, this shock is very, very large. But the other hand it may also be very, very short.

Now we went into this supply shock, arguably well-prepared. In the sense that during the course of like late 2024, all of 2025, and the very early part of 2026, we were telling a story of oversupply surplus. And on top of that, given the military buildup was going on in January and February, a lot of countries in the Arabian Gulf – Saudi Arabia, the UAE, Kuwait – visibly put out a lot of oil at sea.

So, in the oversupply of 2025, we put oil in storage in lots of places that we can't always see. But that seems very likely. Oil in the water was very, very high. So, we have been living off these buffers, and that has helped. And then, yeah, at any point in time, there were good enough reasons to assume that on a timeframe of a couple of weeks, this would largely be resolved. We would eat into these buffers, draw some inventory.

And it has been hard for the market then to really capitalize the size of the supply shock and say, "Yeah, really oil prices need to spike very, very high." And in that sense, we’re left with this significant supply shock, but we haven't taken out the highs that we saw in 2022, for example.

Andrew Sheets: So maybe a way to think about this, right, is that if we imagined all of that oil as sitting in a big tank. We've kind of stopped a lot of the flow into the top of the tank as the Strait of Hormuz has remained closed. But oil's still able to drain out of the bottom, kind of, like normal because that tank is being drained. Those inventories have been drawn down. Maybe that's a quite a crude anal