NEW YORK: Oil prices are falling everywhere as a peace deal between the United States and Iran unleashes a wave of supply, overwhelming demand from buyers and prompting talk of a glut of crude.
It’s a staggering turnaround: less than three months ago the world’s main physical oil benchmark hit an all-time high, and only a few weeks ago senior industry executives were warning that global inventories were reaching critically low levels.
Today, the future of the conflict is still uncertain and much Middle Eastern production remains offline.
Global inventories have indeed been dramatically drawn down during the war.
Yet already Brent crude futures have erased all their wartime gains – tumbling 43% from a high in late April – while the physical oil market is flashing signs of weakness more extreme than any time since the demand collapse of Covid.
For the global economy, the dramatic switch from famine to feast means that worries of an oil-led inflation spike from the biggest supply disruption on record are all but vanquished.
For major oil producers in the Organisation of the Petroleum Exporting Countries (Opec), it means that questions about how quickly they can restore production may soon be replaced by questions about whether they are ready to curb supply to prop up prices, or ultimately find themselves in a fight for market share.
Beyond the immediate impact of the reopening, analysts from Morgan Stanley to Goldman Sachs Group Inc have warned last week that the market is at risk of a glut heading into next year.
“Right now the overwhelming feeling is bearish,” said Kitt Haines, head of oil at Energy Aspects, a consultant.
Even before the United States and Iran signed a memorandum of understanding to reopen the Strait of Hormuz in mid-June, suppliers inside the Persian Gulf had been ramping up shipments.
But in the weeks since, there has been a flood of more than 60 million trapped barrels that were frozen in place when the war began.
Both Saudi Arabia and the United Arab Emirates (UAE) have been at or close to the level of exports they were shipping prior to the Iran war, helped by US military protection while sailing through the Strait of Hormuz, together with pipelines they’ve been using to bypass the waterway.
Iranian oil, for years subject to heavy American sanctions, is now free to purchase again after the US issued sanctions waivers.
The recovery in Hormuz is happening at the same time that much of the oil market’s wartime workarounds are still in place. China, which helped to stabilise the global market by drastically reducing its purchases, has remained largely on the sidelines.
And every week millions of barrels are continuing to flow from emergency underground storage caverns on the US Gulf Coast, part of a record 400 million-barrel release designed to alleviate an oil crisis that no longer exists.
“The market is facing the risk of a temporary glut as trapped oil finally re-enters a system that has already spent months learning how to function without it,” Natasha Kaneva, head of commodities research at JPMorgan Chase & Co, said in a note.
“The barrels now exiting Hormuz increasingly have nowhere to go except China. But China is not buying.”
It’s a surplus that’s visible on both the trading screens of Wall Street and the supertankers plowing the world’s oceans.
In recent days each of the main futures benchmarks in the United States, Europe and Asia have traded in a contango pattern. That structure incentivises traders to put barrels into storage tanks when supply outstrips demand.
As for China, some believe that the prospect of sharply lower prices as Middle Eastern producers kick off a new monthly sales cycle in the coming days could tempt Chinese refiners back to the market.
“Iranian oil is struggling to sell, despite the waiver. And in China, crude from the UAE and Iraq is even cheaper than Iranian,” says Homayoun Falakshahi, a senior analyst at intelligence firm Kpler Ltd.
“For a recovery, you need China to come back – but I think we’re close to the bottom.” — Bloomberg
