Oil Prices Climb Amid Market Chaos Following US, Iran Strikes and Strait of Hormuz Reopening

Crude oil prices are approaching levels seen before the recent conflict, spurred by the reopening of the Strait of Hormuz and an interim deal between the US and Iran. However, beneath this apparent return to normalcy, the global oil market is experiencing significant disruption and volatility.

The market is currently characterized by a race to export trapped oil volumes. Dozens of tankers that were stranded in the Gulf during the conflict have begun to depart. While initial reports suggested flows briefly exceeded pre-war levels, ship-tracking data indicates that overall traffic remains substantially lower than the approximately 125 daily crossings recorded before the conflict. Some vessels are reportedly disabling tracking systems, adding to the market's opacity.

Despite these logistical challenges, a notable increase in Middle Eastern oil is reaching the market. Clearing outbound cargo is only part of the recovery; the crucial next step involves inbound tankers to load crude oil stored onshore. This is essential for producers to restart fields and refineries that were shut down during the conflict. Consultancy Rystad Energy estimates that shut-in production across the Gulf has decreased, with the region expected to return to pre-war output levels by December.

A significant factor influencing the supply outlook is Iran's expected increase in oil production. Following the US suspension of most sanctions restricting its oil exports, Iran could reach an output of 3.3 million barrels per day by year-end, surpassing its pre-conflict levels, provided sanctions relief remains in place. This potential flood of Iranian oil is converging with weak short-term demand, as refineries in Asia and Europe have largely secured their supplies for July and August. Consequently, many tankers may be forced to serve as floating storage, keeping barrels off the market for extended periods. After experiencing a severe supply shock, the market may now be facing the opposite problem: a potential short-term "mini glut."

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the surge in oil exports from the Middle East following the reopening of the Strait of Hormuz is creating a chaotic market that could take months to settle.