Global oil traders have largely maintained a bearish outlook on crude prices, betting on a quick peace deal despite deepening Middle East conflicts and a 9.4 million barrels daily shortfall in global oil production compared to pre-war levels. This stance persists even as attacks in the Red Sea and potential Strait of Hormuz restrictions threaten further supply disruptions.
This bearish sentiment has seen Brent crude dip below $80 per barrel and WTI fall below $75. Traders initially reacted to news of resumed peace talks between the United States and Iran, despite denials from Iranian officials. The market also interpreted Iran's negotiations with Oman regarding the Strait of Hormuz as further bearish news, overlooking significant supply-side risks.
The current situation contrasts sharply with historical oil crises, where futures prices typically reflected on-the-ground events rather than speculation. For instance, the 2022 oil price surge, driven by perceived threats to Russian oil flows, eventually subsided as supply found new routes. This created a market perception that oil supply always finds a way, a belief that may be dangerously misplaced in the current environment.
The International Energy Agency (IEA) reported that global oil production was 9.4 million barrels daily below pre-war levels as of July. This deficit exists despite a temporary rebound of over 4 million barrels daily in June following a short-lived ceasefire deal between the U.S. and Iran. The IEA also warned that nearly 3 million barrels per day of refining capacity in the region has been shut due to attacks and lack of viable export outlets, complicating the refined oil product situation.
The ongoing conflict in the Middle East, particularly the Yemeni Houthis striking Saudi tankers in the Red Sea, forces the rerouting of Saudi oil exports. These exports now use the Suez Canal and a pipeline to the Mediterranean coast of Egypt, which has a much smaller capacity than the East-West pipeline from the Persian Gulf. This rerouting imposes additional constraints on Saudi oil exports, yet traders appear largely oblivious to this critical fact.
Further complicating the supply picture, the Iranian parliament is discussing a bill to ban access to the Strait of Hormuz for U.S., Israeli, and other “hostile” vessels. This strait previously accounted for about one-fifth of global oil and gas trade. Such a ban would severely impede the free passage of energy carriers in the region, significantly impacting global supply.
Analysts note that it takes several months for crude oil supply tightness to fully materialize in physical markets and affect prices. Five months after the initial strikes, the market is much closer to experiencing the full impact of these disruptions. The current disconnect between market sentiment and physical supply realities could make a future oil price shock far more severe than it would have been otherwise.
ING commodity analysts, while acknowledging progress, also highlight the growing distrust between the US and Iran. They anticipate flows will normalize through the third quarter, expecting Brent to average $80 per barrel this quarter. However, some observers are beginning to suspect that a full return to normal may not occur, even after the war ends. Iran's discussions about charging for passage through the Strait of Hormuz and co-managing it with Oman suggest a permanent shift in Middle East oil flows, leading to higher prices while alternative pipelines are developed.