(Bloomberg) – Key parts of the oil market are suddenly awash in supply as the flow of cargo from the Strait of Hormuz intensifies following the U.S.-Iran deal 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 oil tankers smuggling out of the Persian Gulf had already contributed to a small oversupply in some key markets, traders say.
Markets are currently weakening in Europe and Asia as buyers find themselves inundated with cargo offers. In one of the most dramatic examples, Angolan crude oil — a grade typically highly sought after by China — has been selling at the deepest discounts in more than a decade, trading at nearly $10 per barrel below the global benchmark Brent crude. More broadly, traders report that some Chinese refineries are actually offering cargoes of oil for sale, in a drastic reversal of normal flows.
The discounts in Angola show how the global physical oil market went, in just a few months, from a significant shortage to clear signs of oversupply. Middle Eastern crude oil has been trading since mid-month in a bearish contango structure that signals oversupply, and global benchmark Brent crude reversed the trend on Wednesday, with benchmark prices falling below $75 per barrel for the first time since the start of the war.
“You actually get a discount by buying a barrel now instead of a barrel tomorrow, given the weakness in Asian demand for Middle Eastern oil,” Daan Struyven, co-head of global commodities at Goldman Sachs Group Inc., said in an interview with Bloomberg TV. “The reopening is going well and quickly.”
In early April, the price of Brent oil, the world’s main physical benchmark, surpassed US$140, reaching the highest level ever recorded. The rise was driven by panic buying by processors around the world, in response to the war with Iran. Now, this same index has had its value reduced by approximately half and is close to the same level it was at when the war began.
The drop has reignited the prospect of significant oversupply expected to dominate oil markets this year, with the International Energy Agency last week forecasting a sizable surplus in 2027. However, much of the oil market’s success in resolving the problem of supply disruption through the Strait of Hormuz has come at the expense of stocks that will need to be replenished, potentially absorbing some of this oversupply.
Even before the interim peace deal between the US and Iran, millions of barrels a day had already begun quietly entering global markets, including supplies from the United Arab Emirates and Kuwait, and with the help of the US military.
The United Arab Emirates in particular rapidly increased clandestine shipments during the war, and the IEA estimated this week that its total oil exports reached nearly 85% of pre-war levels in early June, before the agreement to reopen the strait more formally.
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Before the signing of the US-Iran agreement, at least one trader who had actively participated in clandestine transactions said privately that he was withdrawing from this complex and expensive trade because the oil was not needed.
In the days that followed, a large volume of trapped oil also began to be released. Iran sent 30 million barrels to Asia in the days leading up to the issuance of a 60-day license granted by the US allowing the sale of oil on the international market, while companies that had not previously transited the waterway — including Saudi shipping giant Bahri — were busy removing the stranded barrels.
In recent weeks, the United Arab Emirates has sold around 60 million barrels of crude oil produced in the Persian Gulf in a series of tenders over the coming months, further increasing pressure on Middle Eastern oil prices.
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As a result, millions of barrels that would normally go to Asia are now on their way to Europe. Bloomberg previously reported that at least six supertankers, carrying a total of 12 million barrels of crude oil from the United Arab Emirates and Oman, are expected to arrive in Europe next month.
The giant Dangote refinery in Nigeria also received shipments from the United Arab Emirates for the first time, demonstrating how increased supply is being met by new markets.
Without a doubt, dangerously low levels of inventories in some parts of the world make the market extremely vulnerable to shocks and further disruptions.
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U.S. crude oil inventories, including strategic reserves, are currently at their lowest level since 1984, while inventories at the main pricing hub of Cushing are also near minimum operating levels. The result has been higher prices in the US relative to the rest of the world, restricting demand for exports.
In other sectors, however, signs of short-term fragility abound.
The North Sea market was trading at a discount to Brent futures this week — a sign that supply in the region, which sets the global benchmark, is abundant. The sale of derivative contracts has been dominated by trading firms and physical oil companies in recent days, according to data compiled by Bloomberg.
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Angolan crude oil grades, which are generally “medium density” — and similar to the large volume of barrels coming from the Persian Gulf — have seen a particularly sharp decline.
“Asian refineries are already well supplied until August, and the barrels released immediately through the Strait of Hormuz simply increase supply, without China being able to meet demand,” said June Goh, senior oil market analyst at Sparta Commodities.
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