Three and a half months after the blocked Strait of Hormuz created the worst oil supply disruption in history, oil prices remain below $100 per barrel amid hopes of an imminent U.S.-Iran deal.
It’s not only hopes that have been keeping prices much lower than a sudden disappearance of 13 million barrels per day (bpd) of supply would warrant.
The market has had major buffers to rely on. China, the world’s top crude importer, slashed imports to multi-year lows, while the U.S. boosted its crude exports to a record high. Strategic releases of oil stocks in developed economies have also helped the market through this unprecedented crisis.
But these buffers are now vanishing, inventories are crashing, and the market is just weeks away from an inflection point and a price spike if the Strait of Hormuz remains largely inaccessible to tanker traffic, analysts say.
“From an inventory perspective, we believe that the end of July could be an inflection point for the market if there is no improvement in energy flows from the Persian Gulf,” Warren Patterson, Head of Commodities Strategy at ING, wrote in a note this week.
This inflection point, without a sustainable improvement in Hormuz traffic, could push Brent Crude prices to spike to as much as $120-$130 per barrel this summer. Such a high price would increase pressure on the U.S. for a deal, Patterson said. Related: Europe Wary Of Too Much Dependence on U.S. LNG
“And failing a deal, one can’t rule out the possibility that we get to a point where energy-starved buyers are more willing to pay Iran tolls for safe passage through the Strait of Hormuz,” the strategist noted.
ING’s base case is that Strait of Hormuz flows will remain largely constrained until the end of July, leaving the market in deficit over the third quarter. The bank expects Brent Crude prices to average $110 per barrel between July and September, before trending lower in the fourth quarter and in 2027 as flows from the Middle East are expected to recover.
The three buffers that have been anchoring oil prices below $100 per barrel (excluding sentiment and Trump-driven volatility) – China’s low imports, record U.S. exports, and SPR releases – are now becoming unsustainable for much longer.
Crude oil imports to China in May fell to their lowest since October 2017 due to the price spike.
The world’s top crude importer started tapping its huge oil reserves last month, in a sign that Beijing is still refraining from paying top-dollar for prompt crude deliveries. So far into this unprecedented crisis, China has slashed refinery run rates, limited exports, and cut demand for road transportation fuels as consumers prefer driving EVs over paying high gasoline prices.
The key question for the oil market is how long China could tolerate stock draws and slashed refinery output, and when it will return to more active crude purchases.
The buffer of record-high U.S. oil and fuel exports, running 1.8 million bpd above year-ago levels since the start of the war, is also unsustainable.
“These stronger exports are coming from inventory rather than additional supply growth. The clear upside risk for the market is if tightening in the US market prompts any intervention from the government when it comes to exports,” ING’s Patterson said.
Finally, the SPR releases are about to be completed soon. In the U.S., the release is set to conclude by the end of July, “after which the pace of tightening in the oil market is likely to pick up”, also amid peak summer demand, the strategist noted.
As the buffers are being depleted, a few more weeks of nearly-closed Strait of Hormuz could tip the oil market into triple-digit prices for the summer, making a deal more urgent for the Trump Administration than it is now.
By Tsvetana Paraskova for Oilprice.com
