Oil retreated on Thursday as traders reacted to signs that crude flows from the Middle East could recover more rapidly than many had expected. Prompt-month Brent for August delivery slid $1.22, or 1.65 percent, to $72.52 a barrel at 0337 GMT, while U.S. West Texas Intermediate declined $1.02, or 1.45 percent, to $69.32 a barrel. Both contracts reached their lowest levels since February 27.
Market structure also indicated an easing in near-term tightness: August Brent was trading below the September contract, which was priced at $73.59, a configuration that signals ample short-term supply.
Analysts and market participants said the pace of the decline has surprised some investors, as sentiment shifted toward a quicker resumption of Middle Eastern barrels. One market note described how participants are now pricing in a much faster return of those supplies than was anticipated a fortnight earlier.
Prices had already moved lower on Wednesday, with Brent off more than $3 and WTI settling nearly $3 down, as supply concerns eased. Contributing to the shift was a report from U.S. Energy Secretary Chris Wright, who said at a forum that flows through the Strait of Hormuz were close to pre-war levels and that at least 20 million barrels had exited the strait in the prior 24 hours. He cautioned, however, that a full return to normal would require a few weeks because the strait needs to be demined.
The apparent return of Middle Eastern supply, coupled with expectations that Iran will increase sales following a temporary reprieve from U.S. sanctions, has pushed down prices for physical crude cargoes across global markets.
Operational measures have accompanied the diplomatic developments. Oman opened temporary routes to facilitate tanker departures from the Strait of Hormuz, with the International Maritime Organization and Omani authorities coordinating vessel movements. In addition, Qatar's prime minister visited Oman to discuss initiating negotiations over future management of the strait with Iran, Iraq and Gulf states.
Diplomatic progress underpinned the shipping recovery. An initial accord reached last week to end the U.S.-Israeli war with Iran, which began on February 28, enabled the restart of traffic through the strait. The accord established a 60-day negotiation period to tackle more difficult issues, including Iran's nuclear programme. U.S. officials suggested oil would continue to flow through the strait even if the deal did not hold, and further stated that Iran would not be able to close it again.
Some market participants are projecting a relatively quick normalization of oil markets as logistical channels reopen. Analysts at Macquarie expect Brent and WTI to average $67 and $62 per barrel, respectively, in the third quarter, down from the second quarter's averages of $94 and $87 per barrel.
At the same time, U.S. crude inventories remain notably depleted. The Energy Information Administration reported that total U.S. crude stocks fell to their lowest level since 1984 last week, a decline attributed to strong refining demand and releases from the U.S. strategic petroleum reserve. Despite the historically low stock level, market reaction to the EIA data was muted as attention centered on developments in the Strait of Hormuz.
Summary of market drivers
- Reopening of the Strait of Hormuz and temporary shipping routes have increased short-term supply expectations.
- Diplomatic accord set a 60-day negotiation window and enabled resumption of traffic; demining remains necessary for full normalization.
- U.S. crude inventories are at their lowest since 1984, but traders focused on Middle East flows.