Oil Prices Decline as Increased Middle Eastern Supply Raises Oversupply Fears

Crude oil prices fell on Tuesday as shipping traffic through the Strait of Hormuz increased amid hopes for a permanent peace deal between the US and Iran, coupled with new warnings about near-term oversupply.

WTI crude dropped 1.8%, settling around $70 per barrel. The more actively traded September Brent contract closed near $73 per barrel. With a provisional US-Iran agreement reopening the Strait of Hormuz, front-month futures have fallen nearly one-third in the second quarter, marking the largest decline since 2020.

As more vessels can pass through this critical energy chokepoint, the oil market is attempting to absorb this additional supply while key alternative measures implemented during the war remain operational.

"The oil market continues to face pressure from expectations that increased fuel exports from the Middle East and Asia will boost global supply," said Dennis Kissler, head of energy trading at BOK Financial Securities Inc. "When you combine that with the US driving season typically peaking in about two weeks, it's hard to find a reason to buy now."

Morgan Stanley lowered its oil price forecast for the second time in roughly two weeks, citing a faster-than-expected recovery in oil shipments through the Strait of Hormuz. The firm also cut its price outlook for a key physical benchmark in the next quarter by one-sixth, warning that flows through the Strait need only recover to about 65% of pre-war levels to create a supply glut. "As the focus shifts to 2027, the market has come full circle back to oversupply," the bank's report stated.

On the diplomatic front, Qatar stated that US officials have arrived in Doha as part of ongoing US-Iran peace talks, while the two nations attempt to de-escalate tensions around the Strait of Hormuz that intensified over the weekend.

Iran reiterated its determination to control maritime traffic through the Strait of Hormuz, yet shipping shows signs of accelerating again following recent attacks in the waterway.

Iran has also received a US sanctions waiver to sell its oil, adding further supply to the market.

Settlement prices saw September Brent crude fall 1.3% to $72.95 per barrel.

The less-traded August contract expired on Tuesday.

August WTI crude declined 1.8% to settle at $69.50 per barrel.