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 operations at previously halted oil fields and increase crude oil supply, there are now projections that the global oil market—which once feared a supply shock—might instead enter a phase of oversupply. Accordingly, some analysts believe this could weaken Iran’s negotiating power.

According to The Wall Street Journal (WSJ) on July 5 (local time), international oil prices have recently fallen to around 70 dollars per barrel, and transit through the Strait of Hormuz is also recovering. As a result, the pace of crude oil stockpiling has become a key variable in the future negotiation structure between the United States and Iran.

U.S. Vice President JD Vance also explained the background of signing a memorandum of understanding (MOU) with Iran in an interview with conservative broadcaster Michael Knowles last week, stating that the world is “replenishing some inventories, and then seeing what cards Iran is holding.”

Crude oil inventories consist of commercial storage tanks near refineries, oil tankers at sea, and government-operated strategic petroleum reserves. Crude oil inventories in member countries of the Organization for Economic Cooperation and Development (OECD) decreased 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 commodity strategy at JPMorgan, noted, “The surge in oil supply is, at least for now, clashing with a market that does not need it.” Macquarie and Citigroup recently projected that international oil prices could drop to 60 dollars per barrel within the coming months.

Nevertheless, it is expected to take considerable time to replenish strategic petroleum reserves. JPMorgan predicted that OECD countries will begin refilling their strategic reserves from the fourth quarter of this year. The United States is expected to start refilling its strategic reserves in 2027, purchasing about 100,000 barrels per day at first, and increasing this to around 170,000 barrels per day in the second half of the year.

Lauri Johnston, founder of oil market analysis firm Commodity Context, commented, “It’s almost comical how the market, which was on the brink of a dangerous supply shock just four months after the Strait of Hormuz was closed, has turned into one with sufficient supply.”

The operation of oil tankers leaving the Strait of Hormuz is also recovering. According to ship-tracking firm Vortexa, approximately 140 million barrels of oil were exported through the Strait of Hormuz in June, averaging 4.7 million barrels per day. This is a significant increase from the daily average of 2 million barrels in May. By early July, the pace of 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 countries, are also expanding supply. On July 5, OPEC+ agreed to increase oil production by 188,000 barrels per day in August, marking the fifth consecutive month of production increases. The WSJ reported that as transit through the Strait of Hormuz recovers and Gulf oil-producing countries revive production, OPEC+’s production hike announcement has become more meaningful than a few months ago.

Gulf oil-producing countries are also rapidly normalizing exports. The United Arab Emirates (UAE), which withdrew from OPEC last May, is quickly increasing exports using a bypass pipeline from Abu Dhabi to Fujairah outside the Strait of Hormuz. Kuwait’s oil export shipments also recovered to around 1.6 million barrels per day last week. Saudi Arabia is utilizing both bypass routes to the Red Sea and oil tankers passing through the Strait of Hormuz.

However, it is expected to take time to actually replenish petroleum reserves. According to the U.S. Energy Information Administration (EIA), as of the week ending June 26, U.S. strategic petroleum reserves had fallen to the lowest level since 1983. Hamad Hussein, commodities economist at London-based Capital Economics, estimated that even if the United States purchases 200,000 barrels per day, it would take 15 to 18 months to restore strategic reserves to pre-war levels.

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

However, there are warnings that the current stability may not last long. Neil Crosby, from market intelligence firm Sparta Commodities, stated that oil prices are “reflecting the perception that hostilities have effectively ended for good,” yet added, “Many, including myself, do not believe this outcome is truly sustainable.”

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