The world is suddenly awash in oil — for now
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Illustration: Aïda Amer/Axios
Wait, what? The ink is barely dry on the U.S.-Iran memorandum of understanding, and somehow the market is swimming in oil.
Why it matters: Middle East oil transit and production have resumed faster than many analysts predicted, helping push down prices.
Reality check: The market could tighten again, and prices could rise anew — and plenty depends on security in the Strait of Hormuz.
How it works: The June 17 deal effectively freed many loaded tankers that had been stranded.
- "A reopening of the Strait of Hormuz is translating into a near-term supply overhang of Middle East oil," researchers with the bank HSBC said in a note on the "mini-glut."
- Those barrels are entering a market with lower demand, thanks in part to China slashing imports. Higher U.S. and Russian exports and strategic releases from the U.S. and elsewhere are also adding to the supply.
"Until China returns as a buyer, short-term physical crude demand will be lackluster," veteran oil analyst Dan Pickering said in a commentary circulated Tuesday night.
What we're watching: The number of tankers heading into the strait to load oil.
- "The next inflection point is likely when the backlog is exhausted, which we estimate could be around two weeks if recent transit levels hold," HSBC's note states.
- At that point, logistics like mine-clearing in the strait and the pace of Persian Gulf producers boosting output will dictate export volumes, it states. And, it notes, countries' coordinated releases from strategic reserves will wind down later in July.
State of play: Global benchmark Brent crude futures are trading at $71.99 per barrel, just below pre-war levels.
- And ING's Warren Patterson notes prices in physical oil markets have weakened, citing widening discounts for various crude grades.
- "Oil markets don't care what type of jawboning or one-off drone strikes are occurring, they care about incremental Middle East barrels reaching end market ... which is happening," Pickering writes.
Zoom in: Patterson's analysis cites estimates that volumes through the strait over the past week have averaged 7 million barrels per day (bpd) compared to 20 million bpd pre-war.
- But with increased Saudi Arabian and United Arab Emirates pipeline shipments that bypass the strait, getting back to 14 million bpd through the waterway would bring the wider region back to pre-war levels, Patterson writes.
The bottom line: Still, he argues the market is "too optimistic" on the speed and sustainability of supply recovery.
Editor's note: This story has been corrected to note that the Brent crude futures trading price is just below pre-war levels (not slightly above pre-war levels).
