Is the market too impatient about oil prices?

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Oil prices plummeted following reports of a ceasefire between the US and Iran, but the core logic driving this decline—that a flood of supply from the Strait of Hormuz is imminent—is increasingly being questioned.

According to the latest Bloomberg report, the ceasefire agreement triggered a significant discount in the crude oil spot market. Angolan crude was sold at a $10 discount to the Brent benchmark for the first time in ten years. Meanwhile, Chinese refiners are also offloading their crude cargoes onto the market. However, just this week, Iran attacked a commercial vessel near the Strait of Hormuz, casting doubt on the reliability of the 60-day ceasefire agreement.

WTI crude oil front-month futures then rebounded about 2%, returning above $70; Brent crude futures also edged higher but remained slightly below pre-war levels. The rapid shift in market sentiment reflects the internal contradictions in the current oil pricing logic.

Surge in departures: Clearing backlog vessels, not new supply

On the surface, tanker flow data in the Strait of Hormuz looks encouraging. But ING Bank's commodity team poured cold water on the optimism: "The sharp increase in flow mainly reflects that previously stranded vessels have finally been allowed to leave the Persian Gulf, rather than new ships entering. The number of vessels entering the Gulf is far less than the number leaving."

According to the Wall Street Journal, the CEO of Phillips 66 estimates that about 90 million to 100 million barrels of crude will gradually leave the Strait of Hormuz. But he also questioned: "Who would dare to send ships in afterwards? Can insurance be obtained? How will all this play out?"

This question points directly at a core loophole in market pricing: the current supply release is essentially a one-off clearance of inventories rather than a sustainable increase in supply. TD Securities' global commodity strategy head Bart Melek told the Wall Street Journal, "Market expectations of supply—especially of inventory—recovery speed may be somewhat overly optimistic."

Geopolitical risks persist, ceasefire agreement in doubt

Shortly after the ceasefire agreement was signed, Iran attacked a commercial vessel, cracking market confidence in the agreement’s stability. IG analyst Tony Sycamore said: "As geopolitical risk premiums quietly return, the market will closely monitor whether tanker flows can continue to recover or whether these latest obstacles will force oil-producing countries to slow expansion plans."

Goldman Sachs co-head of commodities Daan Struyven told Bloomberg, "The reopening is progressing smoothly and rapidly," pointing out that weak Asian demand for Middle Eastern crude has led to spot month discounts. But Goldman also noted that this round of oil price moves follows a familiar pattern—a price surge over the weekend, ending about 30 minutes before futures open on weekdays; the essence of the story remains unchanged.

Iran still insists it will continue to challenge transit through the Strait of Hormuz. Unless there is a substantial change in the situation, expectations for geopolitical easing alone are unlikely to support sustained declines in oil prices.

Inventory shortage, restocking demand may support prices

While the market is pricing in a supply glut, it’s ignoring another side: Crude oil inventories in major global economies have been significantly depleted; restocking demand may become a potential support for oil prices.

The US Strategic Petroleum Reserve (SPR) currently stands at only 331.2 million barrels (as of the week of June 19), the lowest in forty years, even below the level after nearly 200 million barrels were released by the Biden administration in 2023. Importantly, not all barrels in the reserve are freely useable—the minimum operational inventory needed for proper system functioning must be maintained, making the actual available amount even more limited.

In China, the world’s largest crude importer, previous use of massive strategic inventories helped buffer domestic demand and to some extent cushioned the impact of the Hormuz crisis on global oil prices. However, as Persian Gulf exports gradually recover, Chinese refiners are expected to resume purchases after digesting their current cargoes. Moreover, about 5 million bpd of Chinese demand that disappeared earlier this year has not truly returned; once it does, it will significantly impact supply-demand balance.

JPMorgan commodity analysts believe, "The market achieved rebalancing through a combination of demand loss and inventory consumption—both quite different from initial expectations." This means the previous supply-demand logic supporting oil prices has undergone a structural shift; simply projecting a linear pace of supply release post-ceasefire carries considerable uncertainty.

All in all, tanker flow recovery in the Strait of Hormuz is real, but its sustainability is questionable; Iran’s military actions haven’t stopped; global inventories are at historic lows with restocking demand building; oil prices may have already priced in an undelivered supply story.

Risk Warning and DisclaimerThe market carries risks; investment requires caution. This article does not constitute personal investment advice and has not considered individual users’ specific investment objectives, financial situations, or needs. Users should consider whether any opinion, view, or conclusion in this article suits their particular circumstances. All investment decisions are made at your own risk. ```