Oil Market Facing Dangerous Turning Point by Late July
Straits of Hormuz Disruption Could Push Oil Prices to $130 per Barrel
More than three months after the blockade of the Strait of Hormuz caused the worst supply disruption in oil market history, prices remain below $100 per barrel, buoyed by hopes of an imminent agreement between the United States and Iran. However, market buffers are gradually disappearing, and analysts warn the market is just weeks away from a turning point where oil prices could spike if the Strait of Hormuz remains unable to accommodate maritime traffic.
The Dangerous Turning Point Approaches
From an inventory perspective, we believe late July could be a turning point for the market if there is no improvement in energy flows from the Gulf region, Warren Patterson, Head of Commodity Strategy at ING, wrote in a recent report. This turning point, without sustainable improvement in transit through Hormuz, could see Brent oil prices surge to $120-130 per barrel this summer. Such high prices would increase pressure on the US to reach an agreement, Patterson noted.
Three Market Buffers Eroding
Three market buffers have kept oil prices below $100 per barrel (excluding sentiment and volatility driven by Trump): low Chinese imports, record US exports, and the release of strategic oil reserves - all of which are becoming increasingly unsustainable.
| Market Buffer | Current Status | Impact on Oil Prices |
|---|---|---|
| Chinese Imports | Reached lowest level since October 2017 | Reduced demand, stabilizing oil prices |
| US Exports | At record levels, 1.8 million barrels/day higher than same period last year | Partially offsetting supply shortages |
| Strategic Reserve Release | Expected to conclude by end of July | Providing temporary supply |
China's Oil Import Situation
China's crude oil imports in May fell to their lowest since October 2017 due to soaring oil prices. The world's largest crude importer began drawing on its massive oil reserves last month, indicating Beijing is still avoiding paying premium prices for spot cargoes. Until now in this unprecedented crisis, China has reduced refinery operating rates, limited exports, and cut fuel demand for road transport as consumers opt for electric vehicles over paying high gasoline prices.
The key question for the oil market is how long China can withstand drawing down reserves and reducing refinery output, and when it will return to more aggressive crude oil purchasing.
Unsustainable Record US Exports
The record US oil and fuel export buffer, which has been 1.8 million barrels/day higher than the same period last year since the beginning of the conflict, is also unsustainable. These strong exports are coming from inventories rather than from additional supply growth. The clear upside risk to the market is if the US market tightens to the point where the government intervenes regarding exports, ING's Patterson said.
Strategic Reserves Nearly Depleted
Finally, the release of strategic oil reserves is also nearing completion. In the US, the drawdown is expected to conclude by the end of July, after which the pace of oil market tightening could accelerate, also coinciding with peak summer demand, the strategist noted.
Future Scenarios
ING's base scenario is that flows through the Strait of Hormuz will continue to be restricted until the end of July, leaving the market in deficit in the third quarter. The bank forecasts Brent oil prices to average $110 per barrel between July and September, before trending down in the fourth quarter and 2027 as flows from the Middle East are expected to recover.
And if no agreement is reached, we cannot rule out the possibility that energy buyers become willing to pay Iran for safe passage through the Strait of Hormuz, the strategist noted.
Analysts warn that as these buffers are exhausted, several more weeks with the Strait of Hormuz nearly closed could push the oil market into triple-digit prices for the summer, making an agreement more urgent for the Trump administration than it is currently.