International crude oil prices have declined to the levels seen before the outbreak of the Iran conflict, yet the energy market remains far from a state of normalcy. The swift reopening of the Strait of Hormuz has triggered a surge in supply, masking underlying structural issues.
Brent crude traded around $70.83 per barrel on Thursday, with WTI crude at $67.69, essentially erasing all the geopolitical risk premium accumulated during the conflict. Previously, Brent crude had surged to a roughly four-year high of $126.41 on April 30th, driven by disruptions in the Strait of Hormuz.
However, the price decline does not signal the end of the crisis. Data indicates that approximately 37 oil tankers transited the Strait of Hormuz on July 1st. While this marks a significant increase from the daily average of about 10 vessels in preceding months, it remains substantially below the pre-conflict norm of over 100 vessels daily. Salih Yilmaz, a senior analyst at Bloomberg Intelligence, noted: "The return of oil prices to pre-war levels reflects a significantly reduced probability of a severe supply shock, but this does not mean the market has returned to normal." Shipping patterns are not yet fully restored, insurance costs remain elevated, and transit through the Strait of Hormuz has not completely normalized.
The recent rapid decline in oil prices is largely attributable to an unexpected contraction in Chinese demand. JPMorgan strategists point out that the global market lost approximately 11.7 million barrels per day of crude supply due to the Iran conflict. Of this, around 5.3 million barrels per day were absorbed by demand destruction, with China's demand drop and reduced imports accounting for nearly one-third of that figure. However, as more backlogged crude is shipped out from the Strait of Hormuz, the market faces a risk of short-term oversupply.
Looking ahead, the direction of oil prices will hinge on the evolution of supply-demand dynamics. Analysts believe that as long as Gulf shipping, regional exports, and geopolitical tensions do not fully normalize, crude prices may retain a degree of geopolitical risk premium, even if volatility continues to subside.
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