Strait of Hormuz Accelerates Reopening—Is the Decline in Crude Oil Prices Nearing Its End?

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In June, with the US and Iran reaching a memorandum of understanding and signing a temporary peace agreement, the global crude oil market recorded the most dramatic single-quarter price reversal since the pandemic. Brent oil prices plunged from the April peak of $119/barrel to around $73/barrel, a quarterly drop of nearly 38%, completely erasing all gains since the US-Iran conflict at the end of February. The decline in oil prices was not only rapid but encountered almost no effective resistance.

The recovery in shipping through the Strait of Hormuz far exceeded previous market expectations. Since the US and Iran signed the temporary peace agreement on June 17, the daily passage of tankers through the strait surged from less than 10 in May, reaching 35 outbound oil and gas transport vessels by June 25. This is the first time this indicator has returned to the 30-40 range seen before the conflict.

As of the week ending June 21, the region’s average daily crude oil exports have approached 15 million barrels. Crude oil exports from the Persian Gulf have recovered to 75% of pre-war levels, and large volumes of crude oil previously stockpiled in the Persian Gulf and surrounding seas are now returning to the international market.

The market has also started to anticipate an oversupply of crude oil, with physical market signals weakening across the board. For the first time since January, the Brent forward curve switched from backwardation to contango, indicating that spot supply has significantly outpaced market demand. North Sea Dated Brent spot benchmark prices collapsed, and spot premiums quickly converged; Angola crude from West Africa traded at a discount to Brent as wide as $11/barrel, the largest discount in over a decade, also reflecting slowing refinery demand. In Nigeria and Angola’s July shipment plans, many cargoes reported “most unsold”, with the unsold scale hitting a recent high.

The expectation of oversupply is strengthening, mainly reflected in the downward shift of oil price center

The market pricing logic has rapidly switched. As geopolitical risks quickly recede, oil price trends are again dominated by supply and demand fundamentals. Once shipping through the Strait of Hormuz recovers to about 65% of pre-war levels, the global market can once again achieve supply-demand balance. Currently, the recovery speed on the supply side is faster than market expectations, while demand is performing weaker than previously anticipated.

First, Iranian exports have recovered noticeably faster. With partial sanctions relaxed and maritime transportation restored, large volumes of Iranian crude previously stranded are being exported, and Persian Gulf stockpiles spill over rapidly. During the Strait closure, about 160 million barrels of crude oil were stockpiled within and around the Persian Gulf (including 90 million barrels of non-Iranian oil and 70 million barrels of Iranian oil), equivalent to about two days of global consumption. After the reopening, accumulated stocks are being released at a concentrated rate of 8-9 million barrels per day, exerting significant price pressure on an already weak market.

Second, Russian exports hit a new high since the Russia-Ukraine conflict. In the four weeks leading up to June 28, Russia’s average maritime crude exports reached 4.13 million barrels/day. Due to domestic refineries being hit and reduced processing capacity, offshore stockpiles increased by about one third since mid-April, with more crude flowing directly into the international market.

Third, OPEC+ members are gradually implementing previous production increase plans. Countries like Iraq and UAE hope to lift output to make up for fiscal losses suffered during the war.

Meanwhile, the demand side has not improved in sync. US crude oil exports remain high, but China’s imports are significantly weaker than the same period last year. In May, China’s crude oil imports dropped to 7.8 million barrels/day, down 4.2 million barrels/day compared to the January-February average, and maritime imports in the first 20 days of June have fallen further. This situation eases the pressure created by increased supply, making it easier for the global crude oil market to return to a more relaxed supply regime.

The decline in crude oil may be nearing its end

However, relaxed supply does not mean oil prices will return to a long-term bear market. Currently, global inventories remain relatively low. While restored transportation has increased supply, this new crude will take several weeks to actually reach consumption markets. Moreover, concentrated releases of Persian Gulf stockpiled crude are expected to end by mid-July, and releases from the IEA strategic reserves will also wrap up in July.

Currently, observable global inventories are still declining at about 2.3 million barrels/day, refinery demand remains resilient, and new supplies have not yet turned into inventory pressure. This means the current physical market weakness is more a temporary mismatch at the distribution level, rather than the establishment of a surplus regime. By the end of July, after full Strait transport recovery, inventories may gradually shift from drawing down to accumulating.

In addition, there will be new marginal demand from replenishing Strategic Petroleum Reserves (SPR). During the conflict, the IEA coordinated substantial releases of reserves, with US SPR stocks dropping to their lowest since 1983. In the future, both the US and other OECD countries will need to keep replenishing strategic reserves. Global strategic reserve rebuilding is expected to add about 1 million barrels/day in new demand, not enough to fully offset oversupply but able to clearly buffer downward pressure on oil prices.

Additionally, OPEC+ still possesses strong supply adjustment capabilities. Although member countries now wish to boost output, their fiscal revenue remains highly dependent on oil prices. Should Brent fall back below major oil producers’ fiscal balanced levels, OPEC+ is fully capable of slowing or reversing production increases to stabilize market expectations.

Follow-up focus

In the short term, after the Strait of Hormuz reopens, supply will continue to be released. Increased production from Iran, Russia, and OPEC+ may keep oil prices soft, and the market still needs to absorb the supply shock from previously stranded crude being released.

More importantly, current oil prices have largely priced in most pessimistic expectations. WTI crude oil has dropped below $70. Even if the Strait of Hormuz fully resumes shipping, further downside for WTI prices is limited.

In the mid-term, key focus should be on four main points: 1) Whether Strait transport recovery can be stabilized at pre-war levels. If attacks on tankers or transport restrictions recur, geopolitical premium may return to oil prices. 2) Whether global inventories can truly enter an accumulation phase. If inventories continue falling, this suggests resilient demand and the degree of oversupply may be overestimated by the market. 3) The pace of US SPR replenishment. If SPR enters a sustained replenishment phase, it will create new demand and provide important support for oil prices. 4) Whether OPEC+ adjusts production policy. If oil prices fall below major oil producers’ fiscal balance range for a sustained period, production cuts are likely, which would limit further downside for oil prices.

Risk disclosure and disclaimerThe market is risky, and investments should be made cautiously. This article does not constitute personal investment advice, nor does it take into account the individual investment objectives, financial situations, or needs of particular users. Users should consider whether any opinions, viewpoints, or conclusions herein fit their specific circumstances. Investments are made at your own risk. ```