Oil erases wartime gains as more tankers transit Hormuz

OIL’S wartime price gains have evaporated as the US and Iran log progress in peace talks and more tankers openly transit the Strait of Hormuz, easing fears of a supply crunch.

West Texas Intermediate fell to settle near US$70 a barrel, the lowest since the end of February, just before the US and Israel launched their war on Iran. Brent, the global benchmark, settled below US$74 a barrel, also the lowest since the war broke out.

“Oil is dropping sharply as the strait of Hormuz remains open and traders start to focus on Opec, including Iran, potentially moving to maximum production,” Infrastructure Capital Management chief executive Jay Hatfield said. “We forecast that WTI could drop below US$60 over the next two months as production ramps and stocks rebuild.”

Vessels are transiting Hormuz with their satellite signals switched on, indicating growing confidence among shipowners about the safe passage of the chokepoint, through which about a fifth of global oil supplies transited before the war.

The International Maritime Organization also said that it had received safety guarantees allowing hundreds of ships to exit the Persian Gulf.

Washington and Teheran have both flagged early progress in talks to end the war, although negotiations are likely to be protracted and claims from the two sides have diverged. In a sign of how much oil has been leaving Hormuz in recent weeks, the International Energy Agency estimates that the United Arab Emirates is exporting oil at nearly 85 per cent of pre-war levels.

The resumed flows out of the Persian Gulf come as US data showed domestic crude inventories plunged to the lowest since 1984. Stockpiles at Cushing, Oklahoma, dropped below 19 million barrels, according to the Energy Information Administration, slipping below levels many traders view as operational minimums.

Still prices were little changed after the release, with traders focusing on broader signs of easing supply tightness.

A closely-watched oil market indicator flipped into a bearish structure on Wednesday for the first time since February, with Brent’s prompt time-spread trading in a shallow contango, with the nearest contract’s price below the next month’s. That structure typically signals expectations of oversupply.

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Brent hits lowest since before start of Iran war on expectations of smoother oil flows via Hormuz

“I think the physical markets are much weaker than most people anticipated in Asia and Europe with Brent now going contango as well,” TP ICAP analyst Scott Shelton said. “This subtracts buyers from the oil market which makes it fall much more easily.”

There’s also been a collapse in prices for real-world barrels, with premiums for barrels from the North Sea to West Africa tumbling.

Oil prices are down about 40 per cent from their high during the peak of the conflict, with the steady increase in traffic adding to workarounds that were put in place to mitigate disruption through Hormuz at the height of the war.

The UAE alone has sold around 60 million barrels from inside the Persian Gulf in recent weeks.

The Republican-led Senate voted on Tuesday to end the US war with Iran in a rare symbolic rebuke of US President Donald Trump. While the resolution is unlikely to force any changes in the administration’s strategy, it represents the latest sign that the president lacks domestic support for the effort.

Separately, Trump said that he had ordered the Department of Justice to look into why petrol prices have not fallen faster as oil drops. The national average retail price has declined 14 per cent since late May and is now below US$4 a gallon, although it remains above the five-year seasonal average, according to data from the American Automobile Association. US retail diesel prices fell below US$5 a gallon for the first time since mid-March.

The decline in US commercial crude inventories, now at the lowest since January last year, is yet another reminder of just how much American supplies helped make up the global shortfall during the Iran war. On an outright basis, US oil stocks, including the Strategic Petroleum Reserve, are the lowest in over four decades.

For oil market bulls, that indicates there’s not a lot of room for things to go wrong. Market bears can point to the pockets of contango in the world’s other major benchmarks as a sign there’s plenty of oil to go around. BLOOMBERG