To The Moon

The global oil market, having just experienced a semblance of relief following its most severe supply crisis in history, now faces the risk of a sharp reversal.

The International Energy Agency (IEA) warned in its monthly oil market report published Friday, July 10th, that renewed clashes between the US and Iran from Tuesday to Wednesday have severely clouded the market outlook, potentially overturning the agency's forecast for a significant supply surplus next year. The report noted that while global oil supply rebounded by 4.1 million barrels per day in June following the reopening of the Strait of Hormuz, a daily deficit of 9.4 million barrels compared to pre-conflict levels remains. Concurrently, refined product markets remain tight, with refining margins climbing to four-year highs.

Regarding benchmark prices, Brent crude futures traded above $75.80 per barrel during Friday's US afternoon session, slightly below pre-conflict levels. The IEA expects the oil market could shift to a supply surplus before year-end if transit volumes through the Strait of Hormuz can gradually recover, but this prerequisite is becoming increasingly fragile due to the latest clashes. Toril Bosoni, the IEA's head of oil markets, stated that the situation in the Middle East is "extremely uncertain, extremely volatile," and recovery will not be "quick or linear."

The Imperative for Peace

The core warning of this IEA report directly points to the renewed escalation in US-Iran tensions. The report stated that after a memorandum of understanding was signed in mid-June, the Strait of Hormuz reopened, allowing large volumes of crude previously blocked in the Persian Gulf to depart, pushing global supply in June to 988,000 barrels per day. However, renewed hostilities from July 7th to 8th, with multiple vessels attacked, caused transit flows through the Strait to plummet again to a trickle.

The IEA explicitly stated that achieving a lasting peace agreement is a "necessary condition" for the oil market to normalize. Citing the latest clashes, the report noted, "These exchanges of fire highlight the risks of failing to secure a lasting peace deal." The US has indicated it will engage in "technical talks" with Iran and remains committed to finding a solution. However, former President Trump previously declared the ceasefire agreement with Iran "over" and characterized Iran's attacks on commercial vessels as "acts of terrorism."

Against this backdrop, the cost of war risk insurance for vessels has surged dramatically. Reports indicate that war risk insurance rates for vessels in the Persian Gulf have risen to 3% of the vessel's value, up from 2% last weekend, with some quotes as high as 5%.

Next Year's Surplus Hangs in the Balance

The IEA had previously forecast that, following a contraction in oil market supply of 3.7 million barrels per day this year to an average of 10.26 million barrels per day, supply would rebound next year, expanding by 7.5 million barrels per day. This would see the market shift dramatically from a supply deficit of 860,000 barrels per day this year to a surplus of 4.62 million barrels per day in 2025.

However, this forecast is highly dependent on one premise: the sustained recovery of transit volumes through the Strait of Hormuz, enabling oil-producing nations to restart fields and Middle Eastern refineries to resume product shipments. The IEA admits that under current conditions, the realization of this assumption is fraught with uncertainty.

On the demand side, the IEA expects global oil demand this year to fall by 1 million barrels per day compared to last year, marking the first annual decline since the 2020 COVID-19 pandemic. The year-on-year decline in the second quarter reached a peak of 4.8 million barrels per day, with Asia contributing two-thirds of that peak decline.

Looking ahead to next year, the IEA predicts demand will rebound, increasing by 2 million barrels per day, but the combined growth rate over the two years remains far below historical averages. The IEA also notes that sharply lower oil prices are stimulating a recovery in consumption, coupled with an improving economic outlook. Demand is expected to gradually recover from the May low, with the summer travel season potentially boosting consumption by about 8 million barrels per day compared to the peak crisis period in May.

Refining Margins Soar, Product Markets Under Pressure

Despite the rapid recovery in crude oil supply following the Strait's reopening, the recovery in refined product markets has lagged significantly, creating the core market contradiction: apparent crude supply abundance alongside persistently tight product markets.

The IEA points out that this "disconnect" has driven crack spreads and refining margins to four-year highs in early July. While global refinery throughput rebounded by 1.5 million barrels per day month-on-month in June, it remained 6 million barrels per day lower year-on-year. Export-oriented refineries in the Middle East have not restarted, Russian refinery throughput is constrained by intensified strikes on its refining infrastructure, and Asian refineries continue to operate at reduced rates.

Regarding specific products, the jet fuel shortages that previously plagued the market have eased somewhat, but diesel and gasoline supplies are tightening, with gasoline crack spreads rising sharply. The diesel market in the Atlantic Basin has been particularly pronounced in recent weeks, with constrained Middle Eastern output combined with a sharp drop in Russian exports exacerbating the tightening supply situation. The IEA expects global refinery throughput to fall by 2.4 million barrels per day this year before rebounding by 3.1 million barrels per day next year.

Inventories See First Rise in Four Months

On the inventory front, observed global oil inventories increased by 21 million barrels in June, the first rise in four months, following a cumulative draw of 360 million barrels from March to May. The inventory increase was primarily driven by a significant rise in volumes in transit by sea, partially offsetting continued draws in onshore stocks.

Regionally, total OECD inventories fell by another 62 million barrels in June, with about 44 million barrels coming from government stockpile releases. The IEA stated that 69% of the planned 400 million barrel emergency stock release has been completed, with the timing of the remaining releases still uncertain. Chinese crude inventories fell by 41 million barrels in June, contributing to a 37 million barrel decline in non-OECD crude stocks.

Regarding oil price movements, North Sea crude spot prices plunged by about $22 per barrel month-on-month in June to around $68 per barrel, briefly falling below pre-conflict levels, with the futures curve shifting into contango. With the ceasefire breaking down on July 7th-8th, prices have rebounded somewhat, with North Sea crude spot prices reported at around $77 per barrel at the time of the report's writing. OPEC is scheduled to release its own monthly oil market report on July 13th, at which point the market will compare the differing forecasts of the two major agencies.