Delayed Hormuz Normalization Leads to Inventory Depletion... "Oil Prices to Peak in 4Q" [Click e-Market]

WTI Forecast Raised to $81 This Year, Up $5

4Q Inventory Outlook Changes from Build to Net Outflow

Yonhap News

The peak in international oil prices is being pushed back. The normalization of navigation through the Strait of Hormuz continues to be delayed, causing supply disruptions from the Middle East to last longer than expected. The market had initially anticipated a gradual normalization of oil supply and demand after the third quarter, but contrary to these expectations, inventories are shrinking rather than accumulating, and prices are now projected to rise further into the fourth quarter.

According to a recent report by SangSangIn Securities on August 13, oil prices are likely to increase in the fourth quarter of this year. The U.S. Energy Information Administration (EIA) also set its West Texas Intermediate (WTI) forecast at 81 dollars per barrel in its August Short-Term Energy Outlook (STEO), up 5 dollars from the previous projection.

The path of oil prices has been highly sensitive to developments in the Middle East. After the signing of a memorandum of understanding between the U.S. and Iran, WTI dropped to 69 dollars per barrel on July 2. However, following a tanker attack in the Strait of Hormuz just days later on July 7, the situation shifted dramatically, and WTI soared to 92 dollars per barrel on July 23.

The core issue is the disruption in production. The EIA, based on the assumption that passage through the Strait of Hormuz will remain restricted until August and gradually recover from September, has significantly raised its production disruption outlook for seven Middle Eastern countries. The third-quarter disruption is now projected at 6.57 million barrels per day, up from 5.43 million barrels, and for the fourth quarter, it has been revised sharply upward to 4.2 million barrels per day from the previous estimate of 1.44 million barrels.

Actual volumes have also declined significantly. In the second quarter, traffic through the Strait of Hormuz amounted to only 4.9 million barrels per day. This is a sharp decrease compared to the pre-war level of 21.6 million barrels per day.

The outlook for inventories has also changed. Global crude oil stocks saw a net outflow of 4.2 million barrels per day in the second quarter, and another decrease of 3.85 million barrels per day is expected in the third quarter. The most significant change comes in the fourth quarter. In the July forecast, inventories were expected to accumulate at a rate of 2.74 million barrels per day, but the August forecast now calls for a net outflow of 630,000 barrels per day. The timing for inventory build-up has been pushed back.

The outlook for oil demand has not changed significantly—instead, it is the supply side that has shifted. As production forecasts have been lowered by about 1.06 million barrels per day, the annual net outflow has expanded to 1.87 million barrels per day. As a result, commercial inventories in the Organization for Economic Cooperation and Development (OECD) countries are expected to decline to 2.48 billion barrels by the end of this year. When inventories run low, oil prices tend not to ease easily. The bottom for commercial crude inventories has also been delayed until the end of the year, indicating that downward rigidity for oil prices may persist into year-end.

Choi Yechan, research analyst at SangSangIn Securities, explained: “Not only the Strait of Hormuz but also the Bab-el-Mandeb Strait—the alternative sea route for Saudi Arabia—is now threatened by blockades from Yemen’s Houthi rebels. Such uncertainties make the outlook highly subject to change.” He added, “SangSangIn Securities identifies the fourth quarter, when inventories are expected to bottom out, as the likely peak for oil prices. In the medium term, volatility is expected to increase, depending on changes in inventory forecasts as well as developments in the war situation and the scale of production disruptions.”

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