After the reopening of Hormuz, has the oil shortage turned into a glut? | | Oil and Gas News

The Strait of Hormuz is reopening faster than expected, after the US and Iran signed a memorandum of understanding (MoU) and implemented it. Indirect news in Qatar to discuss shipping.

Oil prices around the world have it he has fallen backproviding relief to consumers at the petrol pump. For the third day in a row on Thursday, oil prices fell by about 1 percent, after Qatar said Iran and the US had made progress in talks on the controversial river, which held a fifth of the world’s oil before the US and Israel clashed with Iran on February 28.

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But as the oil boom suddenly resumes, there are fears of an oil shortage, particularly driven by China – the world’s biggest oil exporter – to cut imports.

Investment banking group Morgan Stanley cut its oil forecasts for the second time in two weeks, warning of the risk of a glut – an excess of crude oil on the global market that exceeds consumer demand.

Analysts say such forecasts are based on China’s oil output remaining at a low level, and on the fragile relationship between the US and Iran that remains.

How will oil flow again?

The June 17 agreement between the US and Iran launched a 60-day negotiation period to reach a permanent peace deal that includes the passage of dozens of oil tankers that have been stuck in the Strait of Hormuz since the start of the war.

Under the long-term agreement, Iran agreed to allow ships to pass through the route for 60 days without payment, but word of agreement have been controversial, Tehran argues that it allows it to control the crisis in cooperation with Oman.

Last week, US started protests in Iranciting an attack on a merchant ship as motivation, showing the weakness of the alliance.

Despite the high level of political uncertainty, oil movements resumed faster than many expected, pushing prices down. Morgan Stanley was quoted by Bloomberg as saying that 35 oil and gas tankers were discharged on Thursday in the Strait of Hormuz, marking the first time that the level has returned to pre-war levels.

Brent futures – the global benchmark for oil prices – fell $0.79 ⁠, or 1.1 percent, to $70.78 a barrel by 06:42 GMT on Thursday, while US West Texas Intermediate crude fell $0.84, or 1.2 percent, to $67.74 a barrel. Both benchmarks fell more than 1 percent in the previous quarter.

Is there a risk of being overweight?

Mohammad Reza Farzanegan, professor of economics at the Center for Near and Middle Eastern Studies (CNMS) and the School of Business and Economics at Philipps-Universitat Marburg, Germany, spoke a word of caution on the Morgan Stanley situation.

“I would be cautious about what is predicted,” he told Al Jazeera. “The market is now buying prices for the restoration of the Hormuz pipeline and the temporary opening of Iranian oil exports, but all these ideas remain fragile.”

Prices may also rise, depending on security in the Strait of Hormuz. But that’s not the only way it plays.

In light of the rise in oil prices in recent weeks, China has reduced its exports, and entered the market. Similarly, although it used to import almost half of its crude oil from the Middle East before the war, it has now started exporting from Russia, Kazakhstan, Brazil, Indonesia and Venezuela.

This became the norm in oil markets around the world, keeping oil prices from rising sharply during the war. But with the Strait of Hormuz reopened, imports from China remain at record lows as producers ramp up output.

Additionally, with Washington temporarily lifting oil sanctions on Iran, oil exports from the war-torn country are on the rise again. Bloomberg reported that more than 20 million barrels of Iranian crude are ready to flow for at least seven days, up about 18 percent from a week ago, according to global intelligence group Kpler.

The total amount of the country’s oil that has been loaded by train – either in transit or stationary – has ranged from 58 million to 68 million barrels since the US ban began last week, according to research by Vortexa and Bloomberg.

More than 90 percent of the cargo already in the water has no destination, as independent Chinese refiners – Iran’s biggest customer before the conflict – connect elsewhere.

Kevin Morrison, an economist at the Institute for Energy Economics and Financial Analysis (IEFA), said, therefore, Morgan Stanley’s forecast “is in line with China’s crude oil exports, rather than a return to the opposite level”.

However, there is another factor that could add weight to the oil boom forecast, Morrison said: increased oil production from the Americas, with the US, Canada, Brazil and Argentina all increasing oil output this year. The US, the world’s largest oil producer, set a new record in April, producing 13.934 million barrels per day (bpd) – the highest monthly level ever recorded.

However, the expert said that the oil forecast “depends on the US and Iran maintaining their agreement and resuming oil (in the Strait of Hormuz) to return to the pre-production level of 20 million barrels per day”.

“This volume is unlikely to reach next year due to the destruction of some production facilities during the war,” added Morrison, referring to Iran’s strikes on US economic and electronic equipment in the Gulf countries while the US-Israeli strike on Iran continues.

So, will there be more oil in the market?

Shipments from PortWatch show a slow and steady recovery of traffic through the Strait of Hormuz, rather than steady.

According to Farzanegan, in the CNMS, oil tanker arrivals and tonnage fell after the beginning of March after the start of the Iran war, remained at a low level until April and May, and began to recover at the end of June due to the US-Iran talks.

“Even then, the seven-day moving average remains the lowest of last year,” he said. “This suggests that additional barrels may return to the market, but the recovery is not yet complete.”

US sanctions relief for Iran is also due to expire on August 21. “It is not clear whether this opening will survive beyond August,” Farzanegan said. If it is not increased, this will increase the oil pressure.

In addition, the expert said, the mid-term elections in the US in November could lead to the closure of the problem if there is a resumption of hostility between Iran and the US. “If the Republicans are afraid of losing, the Trump administration may be forced to prevent shocks in oil prices before the vote by using the military in the Persian Gulf,” he said.

As more barrels return to transit in the Strait of Hormuz for a short period of time, global uncertainty may raise the price of security.

“So I can explain this sentiment as a short-term risk due to the high political uncertainty,” Farzanegan concluded, “rather than a stable oil”.