"Bloomberg": Reopening of the Strait of Hormuz Drowns Oil Markets in a Sudden Surplus

SadaNews - Key parts of the oil market have suddenly become flooded with supply, as the flow of shipments from the Strait of Hormuz has accelerated following the U.S.-Iranian agreement to open the waterway.

Even before the agreement, a combination of the release of strategic reserves, a collapse in demand from China, the largest buyer, and a large number of tankers stealthily navigating from the waters of the Arabian Gulf contributed to a small surplus in some key markets, traders say.

Now, markets across Europe and Asia are weakening, as buyers find themselves overwhelmed by shipping offers.

In one of the most dramatic examples, Angolan crude, a grade that is usually quickly bought by China, was sold at the largest discounts in over a decade, sometimes trading as much as $10 per barrel below the global "Brent crude" benchmark.

On a broader scale, traders report that some Chinese refineries have already offered oil shipments for sale, sharply reflecting the usual flow.

These discounts in Angola illustrate how the global physical oil market has shifted in just a few months from huge shortages to signals of oversupply.

Middle Eastern crude has been trading in a bearish "contango" structure since mid-month, indicating an oversupply, and the price of the global "Brent" benchmark turned on Wednesday, with benchmark prices dropping below $75 per barrel for the first time since the war began.

Dan Strive, co-head of global commodities at Goldman Sachs Group Inc, said in an interview with Bloomberg TV: "You actually get a discount for buying a barrel now compared to buying it tomorrow due to weak Asian demand for Middle Eastern crudes." He added, "The reopening of the strait is going well and quickly."

Millions of Barrels Freed from the Hormuz Knot

In early April, the price of the world’s most important physical oil benchmark, "Brent crude," surpassed $140 to reach its highest level ever.

The spike was fueled by panic buying from refineries around the world amid the Iran war. Now, that same benchmark has nearly halved and is approaching the level it was at when the war began.

The drop has brought to the forefront the potential for a major surplus that was expected to dominate oil markets this year, as the "International Energy Agency" predicted a significant surplus by 2027 last week.

However, a large part of the success of the oil market in resolving supply disruptions via Hormuz comes at the expense of stocks that will need replenishing, which could absorb some of that surplus.

Even before the temporary peace agreement between the U.S. and Iran, millions of barrels began quietly seeping into global markets daily, including supplies from the UAE and Kuwait, aided by the U.S. military.

The UAE, in particular, ramped up shipments quickly during the war, with the "International Energy Agency" estimating this week that its total oil exports reached about 85% of pre-war levels by early June, just before the agreement to officially reopen the strait.

Before the signing of the U.S.-Iran agreement, at least one trader who had been actively involved in the "dark" transit operations (without broadcasting transmission signals) stated he was withdrawing from this complicated and costly trade because oil was no longer in demand.

In the days that followed, a wave of stranded oil also began making its way out. Iran shipped 30 million barrels to Asia in the days leading up to the U.S. issuing a 60-day license allowing it to sell oil in the international market, while companies that had not previously navigated the waterway, including the Saudi flagship shipping company "Bahri," were busy releasing the stranded barrels.

In recent weeks, the UAE sold approximately 60 million barrels of crude produced in the Arabian Gulf in a series of tenders for the upcoming months, which increased pressure on oil prices in the Middle East.

Gulf Barrels Heading to New Markets

As a result, millions of barrels that were typically exported to Asia are now heading towards Europe. Bloomberg previously reported that at least six supertankers carrying a total of 12 million barrels of crude from the UAE and Oman are expected to arrive in Europe next month.

The Nigerian giant "Dangote" refinery also snapped up shipments from the UAE for the first time, underscoring how the increase in supplies must be matched by new markets.

To be clear, dangerously low inventory levels in some parts of the world leave the market highly vulnerable to shocks and new disruptions.

U.S. crude inventories, including strategic reserves, have reached their lowest level since 1984, while inventories at the key pricing hub in Cushing are also nearing operational minimum levels. The result has been stronger U.S. prices compared to the rest of the world, limiting demand for exports.

But elsewhere, there are plenty of signs of short-term weakness. The "North Sea" market traded at a discount to "Brent" futures contracts this week, indicating that the supply in the region that sets the global benchmark is ample.

Moreover, trading houses and physical oil companies have dominated the sale of derivatives contracts in recent days, according to data compiled by Bloomberg.

Angolan crude prices, often "medium-quality" and similar to barrels coming out of the Arabian Gulf, have been notably low.

John Guo, senior oil market analyst at Sparta Commodities, noted that "Asian refineries are already well supplied until August, and the spot barrels released from the Strait of Hormuz are simply pushing balances into surplus, without increasing demand from China."