A “mini-tsunami” of oil is flooding the global market after the Strait of Hormuz opened and trapped tankers were finally freed, sending prices down to almost pre-war levels – but the relief may not last long.
August oil futures – contracts to buy at a later date – fell to about $70 a barrel on Wednesday, the lowest level since the day before the US-Iran war began on February 28. Reuters reported.
That’s the same price as oil was last July, just $10 more than it was before the war broke out — a notable shift just one week after the United States and Iran signed a memorandum of understanding to end the war.
The decline in prices is due to millions of barrels of oil that have been stranded in the strait for nearly four months since Iran closed it, but are now being freed day by day and re-entering the market – leading to abundant supply and falling prices.
“The mini-tsunami we are currently seeing after the reopening of the Strait of Hormuz has taken the market from losing barrels to choking on barrels,” said Ole Hansen, an analyst at Saxo Bank.
“So the focus in the near term will be squarely on this wall of barrels and how long it will take to absorb them,” Hansen told Reuters.
20 million barrels of oil have passed through the strait between Tuesday and Wednesday alone, although daily traffic rates are still trending well below before the war, when about 130 ships moved through the passage each day.
About 20% of the world’s oil supply passes through the Strait of Hormuz, making the waterway a flashpoint for the war after Iran blocked it shortly after it was attacked by the United States and Israel.
Oil futures prices reached about $126.41 per barrel when the crisis peaked in April.
The memorandum of understanding stipulated that Iran would open the strait in exchange for the United States lifting oil sanctions. This agreement lasts for 60 days while Iran’s nuclear weapons program undergoes further negotiations.
But low prices may not last once the glut of oil starts selling off, as tensions still float above the strait — a Singapore ship was attacked by Iran on Thursday — making shipping companies wary of using the passage.
The number of tankers exiting the strait to unload their cargo is still higher than those entering to reload, leading to an imbalance that may not stabilize until next year, according to Reuters.