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Thought of the day

Oil prices remain under pressure on Friday, despite a reported projectile attack on a container ship in the Strait of Hormuz. A Singapore-flagged vessel was hit during passage by a suspected drone, marking the first such recorded attack since the US and Iran signed an interim peace deal last week. Brent crude oil was trading 2.2% lower at USD 73.6/bbl at the time of writing, near levels last seen prior to the war’s outbreak in late February.

The steady decline in oil prices started around mid-May, before the deal was signed, as optimism for an imminent agreement reduced the urgency for refineries to secure additional barrels. China’s consumption of its own strategic inventories and record US exports have also kept the overall market better supplied, while Saudi Arabia and the UAE used their pipelines to bypass the Strait of Hormuz and limit the drop in exports from the Gulf.

Since the peace framework was agreed and the blockade of the Strait was lifted, stranded ships in the waterway became available and provided new supplies. Data showed that Iran has managed to export around 40 million barrels of oil since last week, while some 30 million barrels of oil came from non-Iranian Gulf floating storage. Industry estimates put the amount of oil still trapped within the Gulf between 50 and 100 million barrels, and the release of this oil could further pressure prices in the near term.

But while we have lowered our oil forecasts to reflect the reopening of the Strait of Hormuz, we believe the current price level overestimates how quickly traffic through the waterway will normalize and shut-in production will recover. We expect Brent crude to return to USD 85/bbl by the end of this year.

A full return of shipping confidence will take time. Iran has not claimed responsibility for the latest episode, but the incident follows a warning from Iran’s Revolutionary Guard against ships using “unauthorized” routes. The UN’s maritime agency, meanwhile, said it would pause its evacuation plans for ships stuck in the Strait of Hormuz. We believe it will take time for shipping confidence to return fully, including safety assurances and mine clearance to allow insurance premiums to normalize. In our view, only when such confidence is re-established will there be a meaningful uptick in inbound ships loading oil for exports.

The Strait now accommodates fewer ships than before the war. Even when more ships are willing to return to the Gulf, the conflict has resulted in a reduced the number of vessels that can travel through the waterway at one time. Instead of traveling through the middle of the Strait of Hormuz, ships now move through two narrower routes that run along the coasts of Oman and Iran, and these two routes combined can accommodate fewer vessels than before the war.

The process of production recovery is likely to be slower than expected. The closure of the Strait of Hormuz has also led to oil production shut-ins in the Gulf states, and this output can recover only when sufficient non-Iran-bound tankers move into the Gulf. Considering how slowly tankers move—at the pace of a fast bike—it will take time for tankers that were diverted to other regions to move back to the Gulf, as they first need to unload their cargo. We therefore believe the production recovery process will be slow. Over the weekend, Iraq ordered an increase in oil production, only for this to be followed by another shutdown this week due to a lack of empty ships.

So, we expect oil prices to recover from their current levels over the coming months, and believe that broad commodity exposure continues to offer diversification benefits in a portfolio context. Energy can help buffer against renewed supply disruptions, El Niño-related risks may support agricultural commodities, and AI and electrification remain positive for industrial metals.