Oil prices have dropped back to pre-war levels since the United States and Iran agreed to negotiate a deal under a framework that included the reopening of the Strait of Hormuz.
With oil flows out of the Middle East starting to return to the market, analysts, investment banks, and traders expect the global oil glut to return as early as in 2027 and sink oil prices further.
Prices are heading south to $60 per barrel, many analysts think. The futures market seems to think this way, too. Speculators are betting on where they think prices will go in the near term, and most have turned bearish over the past month.
The return of flows through the Strait of Hormuz is making traders confident that the scarcity and supply disruption are over.
No Deal Yet
However, most bets and oil price forecasts assume that the U.S.-Iran memorandum of understanding is a real, lasting peace deal. It’s far from it—it is just a framework to negotiate a potential agreement by the end of August.
Progress on that front is nowhere to be seen, at least publicly, and the situation could deteriorate with renewed tensions at any time. Iran hasn’t given up on asserting some kind of permanent control over the passage through the Strait of Hormuz, including by demanding ‘service fees’ in exchange for safe passage through the chokepoint in coordination with Iranian authorities.
Meanwhile, traffic through the Strait is slowly recovering, but shipowners and operators remain wary of how to approach the transits and what terms and conditions apply.
Related: Washington’s Plan to Neutralize Iran’s Hormuz Leverage
Keeping oil prices low, especially ahead of the midterm elections in the U.S., could be incentive enough for the U.S. Administration to pursue a deal.
But it will not be easy, and concessions will likely have to be made. Moreover, Iran’s nuclear program remains unaddressed in either the MoU or in the scarce talks the parties have held since they signed the deal to make a deal in the middle of June.
Most market speculators bet on Hormuz volumes recovering in the third quarter and oil prices sinking by the end of the year.
Traders point to how remarkably well the market handled the worst supply disruption in history.
But this was due to several factors that helped mitigate the shock to a great extent.
Governments, including the U.S. Administration, released stocks from strategic reserves, depleting the inventories to multi-decade lows.
China stopped buying crude on the spot market as soon as prices spiked in the early days of the war, as Beijing is estimated to have amassed more than 1.3 billion barrels of crude in commercial and strategic stocks by the start of the conflict on February 28.
And the oil market was already headed for a glut before the war began, with millions of barrels of oil sitting in tankers at sea.
Inventories Deplete
The conflict and the halt of Strait of Hormuz flows sapped oil inventories everywhere except China’s massive stockpile, leaving no buffers outside China to offset another disruption. Rebuilding stocks will take time, and a lot of money, and will support part of the demand going forward.
The coming global race to rebuild depleted oil inventories will not be enough to offset a massive glut that’s coming to the market next year, as traffic through the Strait of Hormuz appears to be headed toward normalization, Goldman Sachs said last week.
Brent Crude prices could plunge to as low as $60 per barrel by the end of the year, says Citigroup, which expects flows through the Strait of Hormuz to soon normalize and the U.S. and Iran to reach a deal in the coming months.
Yet, what little is left of oil stocks won’t offset another major spike in prices, other analysts say.
The oil market remains dangerously exposed to the next shock, with inventories so low right now, analysts at Energy Aspects said at the end of June.
Moreover, the crash in Chinese crude oil imports will start to reverse at some point, as only part of the decline was structural, they noted. Meanwhile, the U.S. crude inventories, including the Strategic Petroleum Reserve (SPR), sit at their lowest level since 1985, “with no buffers left to absorb a demand return,” according to Energy Aspects.
The depleted global inventory “doesn’t mean we can’t operate without one, it just means that forward prices could be more prone to spikes,” Ilia Bouchouev of the Oxford Institute for Energy Studies told Reuters.
China Will Eventually Return to Buying
China’s return to buying spot cargoes will also be a big story for the market. Chinese oil imports declined for the fourth consecutive month in June, with seaborne crude arrivals slumping to just over 6 million barrels per day (bpd), the lowest level since at least 2016, according to data by Vortexa.
These will eventually rebound, even if a structural change may not restore the Chinese import demand to pre-war levels, Pamela Munger, Head of Market Analysis EMEA at Vortexa, said.
Wider Asia’s stock rebuild would be a gradual process rather than a flurry of purchasing, according to the analyst.
Until stockpiles are restored, any flip-flop in the U.S.-Iran tensions, negotiations, and sanctions would expose the oil market to yet another disruption and oil prices to another spike.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com
Oilprice Intelligence brings you the signals before they become front-page news. This is the same expert analysis read by veteran traders and political advisors. Get it free, twice a week, and you’ll always know why the market is moving before everyone else.
You get the geopolitical intelligence, the hidden inventory data, and the market whispers that move billions – and we’ll send you $389 in premium energy intelligence, on us, just for subscribing. Join 400,000+ readers today. Get access immediately by clicking here.