The Strait of Hormuz is back in business after more than 100 days of disruption, with more than 60 million barrels of crude oil set to leave the pipeline. Following the US-Iran peace deal, one of the world’s most vital oil routes is set to reopen, freeing millions of barrels of crude that were stuck inside the Persian Gulf. However, the return of crude oil shipments to the market could create a problem that seemed unimaginable just a few weeks ago – an oversupplied market.For Asian refiners, which have spent recent weeks scrambling to secure alternative supplies, the sudden withdrawal of those cargoes could turn concerns about a lack of oil into concerns with too much oil on the way.About 31 supertankers carrying an estimated 62 million barrels of crude were stranded inside the Persian Gulf and are expected to resume sailing once the key shipping route reopens, according to Signal Group data cited by Bloomberg. The development comes after an interim agreement between the United States and Iran is expected to allow the resumption of traffic through the strait.
Markets will become too ‘oily’
Raw materials can reach India in about a week and East Asia in about three weeks. However, the arrival of these volumes comes at a time when many Asian refiners are already well supplied for both this month and next, after moving quickly to secure replacement barrels during the conflict, traders familiar with the matter said. Refiners also have reduced processing rates as higher oil prices have weakened demand for the fuel, he said.The situation marks a sharp change from the early days of the conflict, when oil prices rose and market participants warned of a significant supply shortfall. During that period, refiners increased purchases from regions such as the United States, while China remained largely absent from the market and countries such as Japan drew on domestic inventories.Meanwhile, producers in the Persian Gulf, including Abu Dhabi National Oil Co. and Kuwait Petroleum Corporation, have kept up supplies and moved some cargo through Hormuz. These additional quantities are now contributing to the expected increase in supply.The volume of incoming crude could be large enough to prompt refiners to store barrels in operating tanks or raise processing rates, traders said.“We now believe Persian Gulf exports will return to normal to pre-war levels by the end of July,” Goldman Sachs Group Inc. analysts including Dan Struven said in a note quoted by Bloomberg.
recession in the market
Oil market pricing has begun to reflect expectations of increased supply. The forward curve for benchmark Middle Eastern grades such as Dubai and Murban has shifted into a bearish contango structure for the first time since the conflict began. Oman crude also traded at a discount to the Dubai benchmark this week, as opposed to its usual premium. Additionally, at least one diesel cargo changed hands at a discount to its benchmark compared to earlier trades at a premium.Traders also said at least one South Korean refiner was offering larger-than-usual amounts of distillate fuel, including diesel and jet fuel, for sale. He said refiners were trying to bring supply to the market before the Strait of Hormuz fully reopens, which could put further pressure on prices.
Inside the US-Iran memorandum of understanding
The expected reopening of the Strait of Hormuz is part of a broader memorandum of understanding (MOU) between the United States and Iran that aims to end the military confrontation and create a framework for future negotiations.The 14-point memorandum of understanding, signed virtually by US President Donald Trump and Iranian President Massoud Pezeshkian on Thursday, outlines steps to restore commercial movement through the Strait of Hormuz, release Iran’s frozen assets, provide $300 billion for reconstruction and launch a 60-day negotiation process covering sanctions relief, economic cooperation and Iran’s nuclear program.Although the agreement sets a path toward a final deal, the two sides must negotiate a comprehensive agreement within 60 days. According to Reuters, citing a US official, the parties could still walk away from the memorandum of understanding they are due to sign on Friday. The upcoming talks are expected to focus on the sequence of measures outlined in the initial agreement.If implemented, the arrangement would provide significant strategic, economic and diplomatic benefits to both countries while paving the way for long-term discussions between Washington and Tehran.