US-Iran deal to reopen the Strait of Hormuz: Impact on global oil markets and China
The historic deal could push China to increase oil imports, putting pressure on global inflation
The agreement between the US and Iran to reopen the Strait of Hormuz after more than 100 days of closure could prompt China to return to purchasing larger quantities of crude oil, which could spark inflationary pressures despite forecasts that oil flows from the Middle East will ease. Late Sunday, the US and Iran announced an agreement to reopen the Strait of Hormuz, and the reopening could happen as early as the deal is signed on Friday.
News of the deal sent oil prices plummeting early Monday, with Brent prices falling to $83 per barrel and WTI prices at around $80 per barrel.
Potential impact on oil markets and inflation
If the deal holds and oil flows through the Strait of Hormuz begin to increase relatively quickly, China could continue to buy more crude, and this additional demand that has evaporated over the past three months could tighten the oil market and push up prices, Bloomberg Economics experts said in a report Monday.
"Any recovery in Chinese oil demand - especially if energy flows remain constrained - could tighten global energy markets, inflame inflationary pressures and complicate the task before central banks," Bloomberg Economics analysts wrote.
Energy flow recovery time
Energy flows could take months to recover to pre-war levels, experts say, assuming the deal holds and traffic through the Strait of Hormuz increases sustainably.
China's sharp decline in crude imports has been a pillar that has kept oil prices below $100 per barrel over the past few weeks, along with record U.S. crude and fuel exports and releases from global strategic oil reserves coordinated by the International Energy Agency (IEA).
| Oil market situation before and after the US-Iran agreement | |
|---|---|
| Before the agreement | After the agreement (expected) |
| Brent price: Over $90/barrel | Brent price: ~$83/barrel |
| WTI price: Over $90/barrel | WTI price: ~$80/barrel |
| China reduces oil imports | China can increase imports |
| Strait of Hormuz closed for >100 days | The Strait of Hormuz is expected to reopen |
Changes in China's oil policy
Crude oil imports into China in May fell to their lowest level since October 2017 as prices soared. The world's biggest crude buyer began using its vast oil reserves last month, suggesting Beijing is still avoiding paying high prices for spot oil shipments.
So far in this unprecedented crisis, China has cut refinery run rates, limited exports and reduced demand for road transport fuel as consumers prefer driving electric vehicles rather than paying high gasoline prices.
Important question for the oil market
The key question for the oil market is how much demand China will create when it returns to more aggressive crude buying. A demand recovery from China, combined with the reopening of the Strait of Hormuz, could create a complex market scenario where supply increases but demand also increases, leading to uncertainty about future prices.
Meanwhile, analysts continue to closely monitor the political situation between the US and Iran, as any change in the agreement could quickly reverse the positive effects on the global oil market.
How China manages its domestic oil demand and reestablishes its supply chain following import restrictions will be a key determinant in shaping oil prices over the next few months.