Ryan McKay, senior commodity strategist at TD Securities, argues that oil fundamentals will deteriorate significantly even if a comprehensive deal fully reopens the Strait of Hormuz. McKay predicts significant production losses and inventory depletions in the June-November period, with market deficits peaking in July and then gradually weakening towards the end of the year, causing oil balances to deteriorate despite improving flows in the Middle East.
Tight balance on best case reopening
“The damage has been done and oil markets will continue to contract, even in a comprehensive agreement scenario. This note highlights that even in the most optimistic scenario in which the Strait reopens completely, the barrel math still points to further significant tightening in the oil market. Below is the monthly fundamentals outlook.”
“An additional 1 billion barrels of production would be lost in the June-November period, and inventories would still decline by another 800 million barrels. Tanker logistics, travel times, and delays in bringing production back online suggest that the market this summer would tighten only at a slightly slower pace under the deal than under the status quo. After August, the benefits of an open Hormuz will significantly reduce pressure on the oil market, but the damage may already have been done by then.”
“Be careful with the headlines. Without an actual signed agreement and evidence of increased tanker traffic, our view is that Iran is stalling negotiations and waiting for the inevitable tightening of the energy market to increase its influence. Moreover, any form of agreement or memorandum of understanding [Memorandum of Understanding] which ultimately leaves Iran with functional control over the Strait would continue to result in very restricted flows and an increased risk of further regional conflict.”
“As cargoes that left the Strait in June began to reach their destinations in July and early August, we also saw an escalate of 1.5-2 million barrels per day at Asian refineries during this period. Still production suspended and restricted flows combined with lower SPR [Strategic Petroleum Reserve] flow and higher demand for refineries in Asia will actually escalate the July market deficit to 9.7 mb/d. This would be particularly problematic in a market where inventory levels are expected to reach stress-inducing levels between July and August.”
“By September and into November, rising production in the Middle East will see deficits begin to narrow noticeably, and by November production will return to pre-war levels. We assume that these additional flows will continue to be exported through the Strait, with flows returning to approximately 12 million barrels per day and the remaining 3-3.5 million barrels per day continuing to flow through the Yanbu and Fujairah bypasses.”
(This article was created with the facilitate of an artificial intelligence tool and has been reviewed by an editor.)
