Oil Prices Now Driven More by Supply Than Geopolitics... Q3 WTI Projected at $70–90

Supply Recovery Lags Behind Output Disruptions
Concerns Grow Over Prolonged Supply Shortages

Yonhap News Agency

There is a growing outlook that, in the second half of the year, international oil prices will be influenced more by the pace at which actual crude oil supply is restored than by geopolitical tensions. It is being analyzed that, rather than simply news of war, supply-and-demand data will determine the direction of oil prices.

On the 16th, Huh Gunhyoung, economist at Shinhan Investment Corp., stated in a report, "Following the temporary truce memorandum of understanding signed last month between the United States and Iran, most of the geopolitical risk premium has disappeared. However, the resumption of trade disputes in July has returned the state of the strait to the level seen during wartime," and "since then, the rise in oil prices has been driven more by the pricing in of actual supply disruptions than by a risk premium."

This year, international oil prices have gone through three phases. At the end of February, with the outbreak of war between the United States and Iran, West Texas Intermediate (WTI) crude oil surged to near $120 per barrel. After the memorandum of understanding (MOU) was signed in June, prices fell below $70, but as risks surrounding the Strait of Hormuz resurfaced in July, they rose again to the $80 range.

The key issue is normalization of the Strait of Hormuz. Before the war, the average daily passage of crude oil tankers through the Strait of Hormuz was 26.3 ships, which dropped to virtually zero (0.6 ships per day) during the war. Even after the MOU, it remained at an average of 6.9 ships per day, and on July 13 and 14, the number was zero.

Currently, much of the oil arriving in the market consists of inventory that had already been shipped. As there are no new departures, it is possible that a supply gap will emerge in the physical markets of importing countries between late July and early August.

He also analyzed that even increased production by the Organization of the Petroleum Exporting Countries (OPEC) and the OPEC+ coalition of major oil producers is unlikely to be sufficient to push oil prices down, due to the significant gap between production targets and actual output. Huh pointed out, "A production increase agreement is merely an expression of intent, and actual supply increases are dependent on the prerequisite of normalization of the strait."

Sluggish demand is also unlikely to significantly lower the floor for oil prices. While China's crude oil imports continue to decline, demand for replenishing strategic reserves could result in buying every time oil prices drop.

Looking ahead, oil price trends were forecast under different scenarios. Under the base scenario, with partial normalization by the end of the third quarter and full normalization during the fourth quarter, WTI was projected to be between $70 and $90 per barrel in the third quarter and $60 to $80 in the fourth quarter. The average for the second half of the year was suggested to be in the mid to upper $70s. In the upside scenario, if the blockage of the Strait of Hormuz continues until the end of the year, there is a possibility that WTI will hover around $100. Conversely, if an early resolution occurs, prices could fall to $60 to $80 in the third quarter and $50 to $70 in the fourth quarter.

Oil price instability is also expected to impact inflation and monetary policy. Huh assessed, "The stabilization of prices in June is the result of the oil price decline, not evidence of the end of the monetary tightening cycle," and "as long as oil price instability due to geopolitical risks persists, the risk of monetary tightening remains valid through the paths of inflation, expected inflation, and exchange rates."

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