Crude Oil Prices Plummet as Strait of Hormuz Flow Recovers

The global crude oil market is experiencing significant price declines following reports indicating rapid recovery in oil flow through the Strait of Hormuz. Market analysts have begun forecasting a potential supply glut scenario, even as Iran recently announced it would not meet with U.S. envoys for peace negotiations - an announcement coming after several attacks on vessels in the strategic waterway.

Supply Glut Forecasts Emerge

"The Strait of Hormuz is reopening faster than expected, while the 'dual solution' of high U.S. exports and low Chinese imports remains intact," commodity analysts at Morgan Stanley wrote in a report this week, as cited by Bloomberg. "As attention shifts to 2027, the market is returning to a supply surplus scenario."

Earlier, Goldman Sachs analysts had echoed similar views, noting that oil tanker traffic through the Strait of Hormuz is recovering quickly, observing that "You're actually getting a discount when buying a barrel of oil today versus a barrel tomorrow due to weak demand from Asia for Middle Eastern grades."

The Reality at the Strait of Hormuz

However, there's a crucial detail that analysts forecasting a supply glut are either overlooking or dismissing as irrelevant. The oil tankers leaving the Strait of Hormuz en masse after the U.S. and Iran agreed to a ceasefire until August - which both sides appear to have violated - were actually vessels that had been stuck there for the past three months. These were not new tankers arriving to load oil from Middle Eastern ports.

One reason for this is that alternative routes that some producing countries implemented during the conflict are functioning well. Saudi Arabia is exporting from Yanbu port on the Red Sea, the UAE is using its pipeline to Fujairah, and Iraq is planning to increase flows to Turkey.

OPEC Countries' Oil Production Status

When it comes to Iraq, however, the latest OPEC production data shows that the organization's second-largest member produced 1.76 million barrels of crude oil last month. This figure represents improvement from the average of 1.49 million barrels per day in April, but remains significantly lower than pre-war levels when the country was pumping more than 4 million barrels of crude oil each day.

The production decline due to warfare is why it might be premature to speak of a supply glut. Iraq can certainly restore production to pre-war levels, but that will take more than just a few days. The same applies to all other Gulf producers forced to shut in wells due to insufficient storage capacity while tankers couldn't traverse the Strait of Hormuz. Getting wells operational again takes time.

The Insurance Challenge

There's also the insurance problem. Insurance companies are far from comfortable with the conflict situation. In fact, they're so uncomfortable that they've stopped providing insurance for vessels transiting the Strait of Hormuz, outraging U.S. politicians. The insurance industry is notoriously cautious about losing any money, so they're not rushing to insure tankers whose owners are eager to return to the Persian Gulf and begin loading oil.

"Freight rates are currently extremely high, and you still can't find enough ship owners willing to go back there," Amrita Sen of Energy Aspects told CNBC this week, noting that shipping conditions for the Persian Gulf remain very different from before the U.S. and Israel attacked Iran on February 28.

Alternative Expert Perspectives

Commodity analysts at ING also agree that the situation is far from a supply glut. "Oil tanker traffic through the Strait of Hormuz still appears to be constrained. The total number of tankers transiting, including both inbound and outbound, is estimated at around 11 on Tuesday, down from a peak of 24 last Wednesday," Warren Patterson and Ewa Manthey wrote.

However, they added that "there has been a slight increase in inbound tanker traffic, suggesting ship owners are growing more confident in moving vessels into the Persian Gulf. If this trend accelerates, it could become a countervailing force - and potentially a direct challenge - to our view that oil prices should rise from current levels."

U.S. Oil Production

The reality is, there's no certainty whether this trend or any other will accelerate. When reporting on the volatile situation ranging from peace negotiations to new attacks, which often depends on the day of the week, uncertainty about the future of Middle Eastern oil supply remains high. Meanwhile, the U.S. has reached its highest level in its own oil production, exceeding 13.9 million barrels per day. This reality is the primary reason for renewed discussions about a supply glut.

Once again, there's a detail. The U.S. is certainly the world's largest oil (and gas) producer. However, the U.S. cannot single-handedly make up the remaining supply gap in the Middle East due to the war between the U.S., Israel, and Iran, not only due to physical barriers but also because the majority of U.S. oil is light and sweet, while most refineries worldwide, including in the U.S., need different types of crude oil.

Conclusion

As usual, everything is more complex than headlines suggest. Perhaps analysts should wait and ensure tanker traffic through Hormuz has returned to pre-war levels before forecasting a supply glut.

By Irina Slav for Oilprice.com

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