It was never going to be a straight path to peace, and there was a reason why the extended truce between the US and Iran, which is due to expire in the middle of August, has been characterised as tentative, ostensible, or fragile. Although the Strait reopened and trade flows resumed, there has been no progress in negotiations aimed at denuclearising Iran in return for, among other concessions, the unfreezing of Iranian funds held abroad.

Perhaps this lack of progress led to the inevitable, namely, the attacks on a Qatari LNG tanker and a Saudi-flagged crude oil tanker in the vicinity of the Strait. Both nations have blamed Iran, accusing the Iranian Revolutionary Guard of carrying out the attacks. It is difficult to identify their motivation, although the Iranian foreign minister made it clear that talks would not proceed after President Trump threatened to "finish the job" if no deal was forthcoming and accused Iran of violating the Memorandum of Understanding.

The immediate consequence of the renewed tensions, which pushed crude oil prices up by almost $2 on the day and sent equities lower amid heightened inflation fears, was the post-settlement US response: the revocation of the licence authorising Iranian oil sales, followed by an exchange of military strikes between the adversaries. As a result, the rally has continued this morning, and four oil and gas tankers have reportedly either decided not to transit the Strait or been forced to turn around after Iran declared that the only safe shipping route through the Strait of Hormuz is the one designated by Tehran.

While this development is not entirely unexpected, the recurrence of hostilities has thrown a spanner in the works of the peace talks. So, back to $100? Nothing can be ruled out, but as discussed below, the market's admirable adaptability in weathering the original crisis, and the $56 decline in the price of Brent during May and June, must be kept in mind when revising oil price forecasts.

Impending Oversupply?

It is worth elaborating on the analysis from Energy Intelligence (EI), cited in yesterday's note, which forensically examined how resilient the oil market proved in the face of the disruption caused by the closure of the Strait of Hormuz. The initial assumption that 20 mbpd, the volume that passes through the waterway under normal conditions, would be lost quickly proved inaccurate, as alternative supply routes and leakages reduced the deficit by 7.8 mbpd, resulting in a net loss of 12.2 mbpd. However, in an audacious attempt to dig even deeper, EI concluded that increased combined OPEC+/non-OPEC+ production, the release of crude from the Strategic Petroleum Reserve (SPR), and US sanctions waivers covering Russian and Iranian oil at sea and in floating storage added a further 9.1 mbpd of supply. Draw a line here, and the conclusion is that the effective loss from the original 20 mbpd was only 3.1 mbpd. In other words, the actual supply shortfall was 16.9 mbpd smaller than anticipated at the beginning of March.

And, of course, there is the demand side of the oil equation. As EI points out, there is a compelling case that, because the expected shortage ultimately proved much smaller than initially feared, consumers, seeking to cover the perceived deficit, collectively overshot. Several Far Eastern nations introduced measures such as work-from-home schemes and increased use of public transport, thereby limiting demand. The most striking development, however, came from China, where crude oil imports plunged by a staggering 5 mbpd between February and May. Other consumers in the region also meaningfully reduced refinery runs, further contributing to demand destruction. These measures were perfectly justified and made possible by record-high pre-war oil inventories and, with the benefit of hindsight, understandably neutralised much of the impact of the Strait's closure.

It is against this backdrop that the fragile ceasefire has taken hold and the Strait has reopened. The stage has been set for a considerable supply surplus as oil has begun to flow with relatively few interruptions. Reinforcing this view is the UAE's decision to leave the producer group, freeing itself from any output constraints. Expectations of a substantial oversupply are reflected in rising crude oil exports from the Persian Gulf, Saudi Arabia's aggressive $11/bbl cut to its August official selling price for Asia, and Citi's forecast that Brent could potentially fall to $60/bbl by Christmas.

As straightforward as this line of reasoning appears, several questions remain unanswered. Will flare-ups, such as the one experienced last night, create a significant supply deficit?  Will the increasing availability of crude oil be sustained in the foreseeable future, or will exports from the Middle East begin to decline once stranded cargoes have been cleared? Will the abundance of oil ultimately reach end users, or will it instead be used to replenish depleted inventories, effectively creating additional demand? And will the recent weakness in oil prices stimulate consumption?

The latest Short-Term Energy Outlook, released yesterday by the US Energy Information Administration, does not point to a brighter demand outlook for the remainder of the year. In fact, it has lowered its estimate of global oil demand for the July–December period by 120,000 bpd while simultaneously raising its forecast for non-DoC supply by a whopping 2.49 mbpd. It also expects DoC production to rise faster than previously projected. The group is now forecast to produce 36.51 mbpd in the second half of the year, 2.5 mbpd more than envisaged in June. The fragile ceasefire and the conditional reopening of the Strait of Hormuz have both been factored into the outlook.

Because of the substantial upward revision to non-DoC supply, the call on DoC oil has fallen by 2.6 mbpd since last month. When this is combined with the increase in DoC supply, OECD inventories, which were projected in June to end 2026 at a very low 2.269 billion bbls, are now expected to reach 2.604 billion bbls by year-end. The impact of geopolitics is there for everyone to see. The global oil balance has loosened meaningfully over the past month. How much it has changed since February will be discussed in Friday's report.

Overnight Pricing