Oil Prices Dip to Pre-War Levels Amid Rising Middle East Supply
Futures for Brent crude and West Texas Intermediate fall as increased output from the Middle East outweighs demand worries.
Oil prices on Thursday reached levels not seen since before the start of the Iran war, driven by expectations of increased supply from the Middle East that have overshadowed concerns about demand.
August Brent crude futures for delivery fell 25 cents, or 0.34%, to $73.49 a barrel. U.S. West Texas Intermediate futures also declined, losing 24 cents, or 0.34%, to $70.10 a barrel. Both benchmarks hit their lowest point since February 27, the day prior to the commencement of U.S.-Israeli strikes on Iran.
The August Brent contract was trading below the September contract, which was priced at $73.83, signaling ample immediate supply. Analysts noted that a backlog of vessels in the Persian Gulf is being cleared, contributing to a surge in supply, with evidence of supply assets and terminals restarting.
U.S. Energy Secretary Chris Wright stated that flows through the Strait of Hormuz are nearing pre-war levels, with approximately 20 million barrels transiting the strait in the preceding 24 hours. However, Wright indicated that the full normalization of traffic through the vital waterway would take several weeks, requiring demining operations.
"Most of the increase in flows from the Gulf is outbound — ships exiting the Strait," said UBS analyst Giovanni Staunovo. He added that a significant increase in inbound flows hinges on the return of shipping confidence, necessitating safety assurances and mine clearance to facilitate the normalization of insurance premiums.
The rising supply from the Middle East, coupled with Iran's potential to increase sales following a temporary reprieve from U.S. sanctions, has led to a reduction in the prices of physical crude oil cargoes globally. Goldman Sachs, however, anticipates only a modest increase in Iranian production, even if sanctions relief extends beyond its August 21 expiry. The bank also noted that China is expected to remain the primary buyer of Iranian crude, as European Union and British sanctions on Iranian oil and vessels remain in effect.
An accord reached the previous week to end the war has permitted the resumption of traffic through the Strait of Hormuz, which Iran had previously threatened to blockade. The agreement established a 60-day negotiation period to address more complex issues, including Iran's nuclear program. Secretary Wright affirmed that oil would continue to flow through the strait regardless of the deal's ultimate success and that Iran would be unable to close it again.
In response to these market shifts, UBS has revised its Brent price forecasts downward, now expecting $85 per barrel for both the end of September and December, and $80 per barrel for the end of March and June 2027.