Hormuz Reopening Is Quickly Flooding Oil Markets With Supply

n]epa8bcq[o1a29)gtj8xdl)_media_dl_1.png ICE Futures Europe, Bloomberg

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(Bloomberg) — Key parts of the oil market are suddenly awash in supply, as a stream of cargoes out of the Strait of Hormuz accelerates after the US-Iran agreement to open the waterway. 

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Even before the deal, a combination of strategic inventory releases, a collapse in demand from top buyer China, and a substantial number of tankers sneaking “dark” out of the Persian Gulf had contributed to a small oversupply in some key markets, traders say. 

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Now, markets are weakening across Europe and Asia as buyers find themselves inundated with offers for cargo. In one of the most dramatic examples, Angolan crude — a grade that is typically snapped up by China — has been selling at the biggest discounts in more than a decade, at times changing hands at nearly $10 a barrel below the global Dated Brent benchmark. More broadly, traders say that Chinese refiners are offering oil cargoes for sale, in a stark reversal of normal flows.

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Read: Wave of Persian Gulf Oil Set to Leave Asian Refiners Swamped

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The discounts in Angola show how the global physical oil market has lurched in just a couple of months from significant tightness to flashing signs of oversupply. Middle Eastern crude has been trading since mid-month in a bearish contango structure that signals oversupply, and the global Brent benchmark flipped over on Wednesday, as benchmark prices plunged below $75 a barrel for the first time since the war started. 

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“You actually get a discount to buy a barrel now versus a barrel tomorrow because of the weakness in the Asian pull on Middle Eastern grades,” Daan Struyven, co-head of global commodities at Goldman Sachs Group Inc. said in a Bloomberg TV interview. “Reopening is going well and quickly.”

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In early April, the price of the world’s most important physical oil benchmark, Dated Brent, topped $140 to hit the highest level on record. The surge was buoyed by panic buying from processors across the globe in the face of the Iran war. Now, that same gauge has roughly halved in value and is close to the same level it was at when the war began.

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The drop has brought back the prospect of the significant oversupply that was expected to dominate oil markets this year, with the International Energy Agency last week forecasting a significant surplus in 2027. Still, much of the oil market’s success in solving the problem of supply disruption through Hormuz has come at the expense of inventories that will need to be refilled, potentially soaking up some of that oversupply. 

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Even before the US-Iran interim peace deal, millions of barrels a day had begun quietly sneaking into global markets, including supplies from the United Arab Emirates and Kuwait, and with help from the US military. 

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The UAE in particular quickly ramped up dark shipments through the war, and the IEA estimated this week that its total oil exports reached almost 85% of prewar levels by early June, ahead of the agreement to reopen the strait more formally.