Is the acceleration of the Strait of Hormuz reopening signaling that the crude oil decline is nearing an end?

In June, as the US and Iran reached a memorandum of understanding and signed a temporary ceasefire agreement, the global crude oil market saw the most severe quarter-on-quarter price reversal since the pandemic. Brent crude prices plunged from the April peak of $119 per barrel to around $73 per barrel, a quarterly drop of nearly 38%, fully giving back all gains since the US-Iran conflict at the end of February. The fall in oil prices was not only rapid, but also met with almost no effective resistance.

The recovery speed of shipping through the Strait of Hormuz has far exceeded market expectations. Since the US and Iran signed the temporary ceasefire agreement on June 17, the volume of oil tanker transits through the strait has surged sharply from fewer than 10 vessels per day on average in May to 35 outbound oil and gas transport vessels by June 25. This is the first time this indicator has returned to the 30–40 vessel-per-day range before the conflict.

As of the week ending June 21, the region’s average daily crude oil exports were approaching 15 million barrels. Persian Gulf crude exports have recovered to 75% of pre-war levels; a large amount of crude previously piled up in the Persian Gulf and surrounding waters is now flowing back to international markets.

The market has also begun to anticipate a crude oil supply surplus, and signals in the physical market have weakened across the board. Since January, the Brent forward curve has, for the first time, shifted from backwardation to contango, indicating that spot supply has significantly exceeded market demand. The North Sea Dated Brent spot benchmark price has collapsed, and spot premiums have rapidly converged. The discount of West Africa Angolan crude versus Brent widened at one point to $11 per barrel, the largest discount in more than a decade, which also reflects a slowdown in refinery procurement demand. In the July loading programs for Nigeria and Angola, large numbers of cargoes have been reported as “mostly unsold,” with the volume of unsold cargoes reaching a recent high.

Excess expectations are being strengthened, more reflected as a downward shift in the oil price center

Market pricing logic has switched rapidly accordingly. After geopolitical risk quickly declined, control over oil price movements returned to supply-and-demand fundamentals. For the global market to rebalance supply and demand, the shipping volume through the Strait of Hormuz only needs to recover to about 65% of pre-war levels. Currently, the recovery pace on the supply side is faster than the market had expected, while performance on the demand side is weaker than previously judged.