Global Oil Market Shifts from Supply Worries to Hormuz Strait Passage Concerns

Global Oil Market: Oversupply Risks and Strait of Hormuz Tensions

As peace negotiations between Iran and the United States show signs of stalling, analysts have begun discussing the risk of oversupply as the number of oil tankers leaving the Persian Gulf has increased significantly compared to three months prior. Importing nations have even been warned about a "wave" of crude oil heading their way. Meanwhile, some parties are preparing for a future where transit fees through the Strait of Hormuz may become part of the oil price formation mechanism.

Warning About Crude Oil Oversupply

The Wall Street Journal is the latest publication to issue warnings about crude oil oversupply, following reports from other major media outlets citing analysts forecasting that the global oil market will shift from a significant deficit to oversupply. The latest production data from OPEC supports the argument that supply is improving, although forecasts of oversupply may be somewhat premature. However, the group's total output increased by 3.3 million barrels per day last month compared to May, reaching 19.43 million barrels per day. This figure still remains far from pre-conflict production levels.

Record Production and High Exports

Meanwhile, the United States has broken another record for oil production, pumping nearly 14 million barrels per day, and the UAE is reported to be exporting at record volumes as it empties its storage tanks, which had been filled to capacity during the war period when the Strait of Hormuz was closed. However, there is an important detail in the overall picture, and that detail is oil in storage.

The Important Role of Oil in Storage

The Wall Street Journal reported earlier this month that adding oil to global storage is an important part of the negotiations. In fact, the publication cited U.S. Vice President J.D. Vance as saying that both sides had signed a preliminary agreement to allow countries "to build up some reserves and then see how things play out."

Less hasty analysts have pointed out that the recovery of oil tanker flows through the Strait of Hormuz is unlikely to be considered a factor leading to crude oil oversupply, as many countries had to use their own oil reserves, and used them heavily. This now needs to be replenished.

Different Analyses of the Future Oil Market

"A wave of increased oil supply is about to hit a market that, at least for now, simply doesn't need it," said Natasha Kaneva of JP Morgan as quoted by the Wall Street Journal, reflecting the views of other analysts who believe the world needs less oil than is currently being supplied. This is an interesting viewpoint when just about two weeks ago, analysts were nearly unanimous in their assessment of the conflict, acknowledging demand destruction due to high prices and forecasting that shortages could persist until 2027 if the war dragged on long enough.

The ING analyst, unlike JP Morgan's Kaneva, expects crude oil purchasing demand to improve in the future, driven by lower prices, acknowledging the basic laws that govern the oil market. Cheap oil drives higher demand while expensive oil drives lower demand. Assessing that although tanker flows have recovered from the Persian Gulf and the U.S. is still releasing oil from strategic reserves, Warren Patterson and Ewa Manthey wrote on Friday: "With prices currently falling and the price curve shifting into contango, we may start to see more buying in the market."

Concerns About Hormuz Transit Fees

The price at which these purchases will occur may include transit fees through Hormuz, which would be paid to both Iran and Oman, Bloomberg reported earlier this month, citing several European countries preparing for that scenario. According to the report, the view that Iran and Oman would demand payment for oil tankers is also shared by some officials from Gulf countries, but only privately.

The official position of Gulf countries and the United States is that maritime law would not allow this, and if Iran or both Iran and Oman proceed with charging fees, it would set a precedent for other countries with strategic waterways in their maritime territory. However, oil buyers from the European Union are particularly concerned about the possibility of having to pay fees for Hormuz, noting that even after oil prices fell sharply from wartime highs, oil is still not cheap enough for some importers, let alone another price hike whenever it might occur, as in cyclical industries.

Efforts to Stabilize Oil Prices

Currently, however, everything seems to be focused on keeping prices as low as possible. OPEC is increasing production to make up for three months or more of lost exports, the United States is trying to lower gasoline and diesel prices further, and importing countries are replenishing their reserves. After concerns about recession and airline bankruptcies, a slight reprieve has been provided to the global economy. It is not yet certain whether this reprieve is permanent, and this needs to be kept in mind.

"After the long U.S. holiday, traders are sitting tight and waiting to see whether the relationship between the U.S. and Iran will be friendly or volatile this week," Tim Waterer, chief analyst at KCM Trade, told Reuters today. That is sound advice, even after news that OPEC has agreed to increase production further in August.

Recent Oil Market Overview

Market experts are closely monitoring the development of relations between Iran and the U.S., as well as OPEC's production decisions, as these factors will have a significant impact on oil prices in the near future. Against the backdrop of complex geopolitical situations in the Middle East, the oil market continues to demonstrate its sensitivity to political changes and the stability of important oil transportation routes.

Irna Slav for Oilprice.com