Oil Prices Return to Pre-War Levels... Is Iran Losing Its Hormuz Leverage?

JPMorgan: "OECD Likely to Refill Strategic Reserves From 4Q"


Little Incentive for the U.S. to Rebuild Its Reserves

As Gulf oil-producing countries resume previously halted oil field operations and increase crude oil supply, there are now projections that the global oil market—which once feared a supply shock—may instead enter a phase of oversupply. As a result, analysts suggest that Iran’s negotiating leverage could weaken.

According to the Wall Street Journal (WSJ) on July 5 (local time), international crude oil prices have recently dropped to around $70 per barrel, and the passage through the Strait of Hormuz is also recovering. As such, the pace of crude oil stockpile replenishment has become an important factor in shaping the future negotiation dynamics between the United States and Iran.

U.S. Vice President J.D. Vance also commented in an interview last week with conservative broadcaster Michael Knowles, saying that the background to signing a memorandum of understanding (MOU) with Iran was for the world to “replenish some of the stockpiles and then assess Tehran’s stance at the negotiating table.”

Crude oil inventories are comprised of commercial storage tanks near refineries, oil tankers afloat at sea, and strategic petroleum reserves managed by governments. The crude oil inventory of member countries of the Organization for Economic Cooperation and Development (OECD) fell by 163 million barrels from March to May, dropping to the lowest level since December 1990.

However, market sentiment is changing rapidly. Natasha Kaneva, global head of commodities strategy at JP Morgan, observed that “the surge in oil supply is now, at least for the moment, clashing with a market that does not need it.” Macquarie and Citigroup recently predicted that international oil prices could fall to as low as $60 per barrel within the next few months.

Nevertheless, replenishing strategic petroleum reserves is expected to take considerable time. JP Morgan projected that OECD countries will begin refilling their strategic reserves starting in the fourth quarter of this year. In the case of the United States, the bank forecast that the country will only begin replenishing its reserves in 2027, initially purchasing at a rate of 100,000 barrels per day and then increasing to about 170,000 barrels per day in the second half of that year.

Rory Johnston, founder of oil market research firm Commodity Context, described the situation as “almost comical,” noting that within just four months of the Strait of Hormuz being closed, what could have been a dangerous supply shock has instead turned into a market with ample supply.

The operation of oil tankers passing through the Strait of Hormuz is also recovering. According to ship-tracking firm Vortexa, approximately 140 million barrels of crude oil were shipped out through the Strait of Hormuz in June alone, averaging about 4.7 million barrels per day. This marks a significant increase from the daily average of 2 million barrels in May. As of early July, crude oil exports had recovered to about 40% of pre-war levels.

The Organization of the Petroleum Exporting Countries (OPEC) and OPEC+, a coalition of major oil-producing nations, have also moved to expand supply. On July 5, OPEC+ agreed to raise production by 188,000 barrels per day in August, marking the fifth consecutive month of output increases. WSJ reported that as passage through the Strait of Hormuz recovers and Gulf oil producers revive their production, OPEC+’s announcement of an output increase now carries more practical significance than it did several months ago.

Gulf oil producers are also steadily normalizing their exports. The United Arab Emirates (UAE), which withdrew from OPEC in May, is rapidly boosting exports by utilizing a bypass pipeline from Abu Dhabi to Fujairah, outside the Strait of Hormuz. Kuwait’s crude oil export shipments also recovered to around 1.6 million barrels per day last week. Saudi Arabia is utilizing both the bypass route to the Red Sea and tankers passing through the Strait of Hormuz.

However, it is expected that actual replenishment of strategic reserves will take time. According to the U.S. Energy Information Administration (EIA), as of the week ending June 26, the U.S. strategic petroleum reserve fell to its lowest level since 1983. Hamad Hussein, commodities economist at London-based Capital Economics, estimated that even if the U.S. were to purchase 200,000 barrels per day, it would take 15 to 18 months to restore strategic reserves to pre-war levels.

There is also analysis suggesting that the United States has little incentive to actively refill its reserves. Rahul Chowdhury, oil and gas analyst at Rystad Energy, said, “Washington has not sufficiently rebuilt its strategic reserves after the previous release cycle,” adding that “with the focus on keeping oil prices low, there is not much incentive to aggressively purchase and refill the reserves at this time.”

However, there are also warnings that the current stability may not last long. Neil Crosby of market intelligence firm Sparta Commodities said that while oil prices are “reflecting the perception that hostilities are effectively over for good,” he and many others do not believe this outcome is truly sustainable.

This content was produced with the assistance of AI translation services.