Global crude oil markets are undergoing a dramatic fundamental shift from 'supply panic' to 'glut crisis' as geopolitical tensions between the U.S. and Iran substantially ease.
On Wednesday, international oil prices once again faced a sell-off, with both WTI and Brent crude futures at one point falling by over 1.70%. Brent crude broke below the $73 mark, a significant retreat from its peak above $126 during the war period.
Key Drivers of the Price Slump
The immediate driver of the oil price plunge is the rapid de-escalation of the Middle East geopolitical situation. A White House spokesperson explicitly stated there is a significant chance for the U.S. and Iran to reach an agreement, with delegations from both sides holding indirect talks in Doha on July 1st to advance issues like unfreezing assets and ensuring maritime security in the Strait.
Both Goldman Sachs and Morgan Stanley assert that the global oil market is on the verge of returning to a state of severe oversupply. Even considering the substantial demand for global strategic petroleum reserve replenishment, the average daily net surplus in the crude market next year is still expected to approach 2 million barrels, creating long-term downward pressure on prices.
Geopolitical Premium Unwinds as Deal Progresses
The crude market is rapidly stripping away the war premium priced in earlier. According to reports, sources revealed that the U.S. and Iran held indirect talks in Doha, Qatar's capital, on July 1st, with Qatar and Pakistan acting as mediators. The talks focused on implementing a U.S.-Iran memorandum of understanding, with core issues including unfreezing Iran's frozen assets and ensuring maritime security in the Strait of Hormuz.
With the implementation of a provisional U.S.-Iran peace agreement, shipping in the Strait of Hormuz, a vital waterway connecting the Persian Gulf to global markets, is recovering.
Despite two recent vessel attack incidents, ship traffic through the Strait continues to increase. Meanwhile, Iran has reiterated its commitment to managing maritime traffic in the passage and may take joint action with Oman.
Shipping Recovery Imminent, Wall Street Turns Bearish
The smooth flow of Middle East crude supply channels has directly sparked investment bank concerns about market oversupply.
Samantha Dart, Co-Head of Global Commodities Research at Goldman Sachs Group, stated in a Bloomberg Television interview that as the impact of the Iran war fades and traffic in the Strait of Hormuz normalizes, a situation of global oil market oversupply will re-emerge.
Samantha Dart noted that exports through the Strait of Hormuz are expected to normalize by the end of July. Once Strait flows recover, the market will enter an oversupply scenario, with the average daily crude surplus next year projected to be slightly above 3 million barrels.
She added that because U.S. energy exports and Chinese imports have remained stable, the market did not react violently to the short-term 'disruption' in the Strait, indicating the crude market is moving towards a return to normalcy.
Morgan Stanley's view aligns closely with Goldman's, having lowered its oil price forecast twice in just over two weeks.
Analysts at Morgan Stanley stated bluntly in a report this week that as the market looks toward 2027, the crude market has returned to square one, facing oversupply once again.
Strategic Reserve Replenishment Insufficient to Counter Glut
In the initial weeks of the conflict, the International Energy Agency (IEA) coordinated a record release of 400 million barrels of emergency crude reserves to curb prices.
As part of that plan, the U.S. administration tapped the Strategic Petroleum Reserve (SPR). Official data shows U.S. crude inventories fell from 415 million barrels at the end of February to 331 million barrels on June 19th, the lowest level since 1983.
Although these depleted reserves urgently need rebuilding, it is insufficient to reverse the oversupply trend.
Samantha Dart estimates that the global demand for replenishing strategic petroleum reserves is expected to be slightly above 1 million barrels per day. While this will tighten the market to some extent, it can only partially offset the anticipated surplus, leaving the market ultimately facing a net surplus of nearly 2 million barrels per day.
Potential Transit Fee Unlikely to Impact Energy Costs
Regarding market concerns about subsequent shipping costs in the Strait of Hormuz, Goldman Sachs believes their substantive impact on global energy prices is limited.
When asked about proposals to levy a transit fee on vessels, Samantha Dart stated that shipping companies' primary concern currently is actually certainty in regulatory rules.
Industry feedback indicates shipowners do not mind paying a transit fee, provided the rules are clear to avoid violating U.S. sanctions. Based on previously discussed informal standards, this fee would be around $1 per barrel.
Samantha Dart pointed out that this cost is not materially different from the daily fluctuations in crude oil prices. Judging from the attitude of shipping companies, it remains unclear whether this additional cost would significantly raise global energy costs, and it most likely will not fundamentally impact crude oil pricing.
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