Hormuz reopening is quickly flooding oil markets with supply

[SINGAPORE] Key parts of the oil market are suddenly awash in supply, as a stream of cargoes out of the Strait of Hormuz accelerates after the US-Iran agreement to open the waterway.

Even before the deal, a combination of strategic inventory releases, a collapse in demand from top buyer China, and a substantial number of tankers sneaking “dark” out of the Persian Gulf had contributed to a small oversupply in some key markets, traders say.

Now, markets are weakening across Europe and Asia as buyers find themselves inundated with offers for cargo.

In one of the most dramatic examples, Angolan crude – a grade that is typically snapped up by China – has been selling at the biggest discounts in more than a decade, at times changing hands at nearly US$10 a barrel below the global Dated Brent benchmark.

More broadly, traders say that some Chinese refiners have actually been offering oil cargoes for sale, in a stark reversal of normal flows.

The discounts in Angola show how the global physical oil market has lurched in just a couple of months from significant tightness to flashing signs of oversupply.

Middle Eastern crude has been trading since mid-month in a bearish contango structure that signals oversupply, and the global Brent benchmark flipped over on Wednesday (Jun 24), as benchmark prices plunged below US$75 a barrel for the first time since the war started.

“You actually get a discount to buy a barrel now versus a barrel tomorrow because of the weakness in the Asian pull on Middle Eastern grades,” said Daan Struyven, co-head of global commodities at Goldman Sachs. “Reopening is going well and quickly.”

In early April, the price of the world’s most important physical oil benchmark, Dated Brent, topped US$140 to hit the highest level on record.

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The surge was buoyed by panic buying from processors across the globe in the face of the Iran war. Now, that same gauge has roughly halved in value and is close to the same level it was at when the war began.

The drop has brought back the prospect of the significant oversupply that was expected to dominate oil markets this year, with the International Energy Agency (IEA) last week forecasting a significant surplus in 2027.

Still, much of the oil market’s success in solving the problem of supply disruption through Hormuz has come at the expense of inventories that will need to be refilled, potentially soaking up some of that oversupply.

Even before the US-Iran interim peace deal, millions of barrels a day had begun quietly sneaking into global markets, including supplies from the United Arab Emirates and Kuwait, and with help from the US military.

The UAE in particular quickly ramped up dark shipments through the war, and the IEA estimated this week that its total oil exports reached almost 85 per cent of prewar levels by early June, ahead of the agreement to reopen the strait more formally.

Before the US-Iran deal was signed, at least one trader who had been actively involved in dark transits said privately that they were pulling back from the complex and expensive trade, because the oil was not needed.

In the days since, a flood of trapped oil has also been making its way out. Iran shipped 30 million barrels to Asia in the days before the US issued a 60-day license allowing it to sell oil on the international market, while companies that had not previously transited the waterway, including Saudi tanker giant Bahri, have been busy getting trapped barrels out.

In recent weeks, the UAE has sold about 60 million barrels of crude produced inside the Persian Gulf in a series of tenders for the coming months, each time adding further pressure onto prices for Middle Eastern oil.

As a result, millions of barrels are now heading to Europe that would normally be destined for Asia. Bloomberg reported previously that at least six supertankers carrying a combined of 12 million barrels of crude from the UAE and Oman are currently set to arrive in Europe next month.

Nigeria’s giant Dangote refinery also snapped up shipments from the UAE for the first time, underscoring how the rise in supplies is having to be met with new markets.

To be sure, perilously low stockpiles levels in some parts of the world leave the market extremely vulnerable to shocks and fresh disruption.

US crude inventories, including strategic reserves, are currently at the lowest level since 1984, while stockpiles at the key pricing hub of Cushing are also close to operational minimum levels. The result has been stronger US prices relative to the rest of the world, curbing demand for exports.

Elsewhere though, signs of short-term weakness abound.

The North Sea market was trading at a discount to Brent futures this week, a sign that supply in the region that sets the global benchmark is plentiful. Selling of derivatives contracts has been dominated by trading houses and physical oil companies in recent days, according to data compiled by Bloomberg.

Angolan grades, which are often “medium density” crude, and similar to the flood of barrels coming out of the Persian Gulf, have been particularly depressed.

“Asian refineries are already well supplied till August, and the prompt barrels released from the Strait of Hormuz simply push the balances to an overhang, without China picking up on demand,” said June Goh, a senior oil market analyst at Sparta Commodities. BLOOMBERG