Deceptively cheap: why the sharp drop in oil prices cannot be trusted
After the signing of the ceasefire memorandum between the United States and Iran, oil prices went into a sharp decline. Futures for the North Sea Brent variety dropped below $71 per barrel, while American WTI is trading below $68. Investors are pricing in the complete removal of geopolitical risks and the imminent return of millions of blocked barrels to the market. However, it is actually too early to rely on the futures price as an indicator of what is happening in the oil industry. The markets show excessive confidence in the diplomatic documents that do not yet exist, which may diverge from real events. Whether oil will continue to fall in price is in the Izvestia article.
The Hormuz toll
First of all, it is worth noting that the Strait of Hormuz, through which about 20% of the world's oil supplies pass, remains in a state of uncertainty. Despite the lifting of the naval blockade, traffic through this key artery remains at levels significantly below pre-war levels. Shipowners are in no hurry to return supertankers to the region. The new rules of the game are not yet fully understood either from a financial or a legal point of view.
Currently, Iran and Oman are conducting closed-door negotiations on the introduction of a specialized duty for the transit of ships through the strait. Tehran insists that it is the Islamic Republic that should determine the order of movement and ensure safety in the water area, which implies charging fees. For shippers, this means the appearance of a new unpredictable tax. Combined with insurance premiums for military risks, which London underwriters are in no hurry to reduce, transportation across the Persian Gulf remains extremely expensive.
The second problem is purely engineering in nature. The market assesses the situation as if the production and export capacities of OPEC countries are ready to reach peak capacity at any moment. In reality, the region's infrastructure has suffered serious damage during the months of air strikes. The largest terminals and primary oil treatment plants are in need of repairs, requiring the supply of sophisticated equipment from abroad. The exact amount of capacity that Saudi Arabia, the UAE and Iran are able to quickly bring back to the market is still unknown.
Analysts point to a clear bias in investor estimates. Maria Belova, Director of Research at the Implementation consulting company, notes that the current decline in quotations is dictated solely by political optimism. The market is waiting for a large influx of supplies, ignoring the real situation.
"In this situation, paper prices may fall to levels that do not take into account real logistical failures," the expert explains. Bidders, in her opinion, tend to underestimate the time needed to restore export flows and turn a blind eye to the technical limitations of damaged ports and fisheries.
The Chinese factor
If supply is recovering slowly, why do prices keep falling? The answer lies in the consumption statistics. Exchanges were afraid of a sharp reduction in demand from the world's main importer, China.
Against the background of high prices in the spring of 2026, Beijing began aggressively reducing oil purchases on foreign markets, switching to using up previously accumulated cheap reserves. Statistics show a steep drop in imports. On the eve of the conflict, China was buying over 12.5 million barrels per day. In March, this figure dropped to 11.8 million. The decline accelerated further: the April OPEC report recorded a decrease to 9.3 million barrels. The General Administration of Customs of the People's Republic of China estimated May imports at 7.8 million, and according to preliminary estimates by the analytical company Kpler, in June the figure fell to 5.8 million barrels per day.
Nikolay Dudchenko, an analyst at Finam, believes that it was the combination of these data that created confidence in the market about the upcoming oversupply of raw materials. There were concerns that the increasing supply would overlap with reduced demand from key consumers.
At the same time, the expert warns against excessive confidence in the current geopolitical lull. The minimum requirements of the conflicting parties still do not coincide, and the issue of Tehran's nuclear program has been placed outside the current agreements.
— It cannot be ruled out that at some stage we will see escalation again. It is possible that this may happen after the November elections in the United States. In this case, oil prices may rise significantly again," Dudchenko predicts.
Debt to reserves
The main miscalculation of futures sellers is to ignore pent-up demand. The current market balance looks tolerable only because developed countries have been compensating for the lack of Middle Eastern oil for several months at the expense of their own strategic reserves.
The US reserves have been depleted to the levels of the early 1980s. Japan, South Korea, and European countries have also deployed a significant portion of their emergency storage facilities. These volumes will have to be returned. Governments will be forced to enter the market with huge bids to purchase raw materials to replenish strategic reserves as soon as prices seem acceptable to them.
The same can be said about China. Given the difficult geopolitical situation, it is unlikely that the Chinese government will want to have empty fuel storage facilities in the next few years. There is every reason to believe that China will soon begin to replenish the tens, if not hundreds, of millions of barrels that were spent this spring and early summer.
This process will form the lower threshold for quotes. Any surpluses that OPEC+ countries try to bring to the market as part of the quota increase will be immediately absorbed by government reserve programs.
That is why Maria Belova is confident that it is pointless to expect an era of cheap hydrocarbons in the near future.
"There will be no oil abundance market either this year or next year," she emphasizes.
The expert recalls that even with the complete restoration of traffic through Hormuz and the lifting of sanctions against Iran, the need to replenish the spent global reserves will create a powerful additional demand.
In the coming years, prices will indeed be subject to pressure as the damaged Middle Eastern terminals are put into operation. However, the current drop to $70 per barrel is an advance. The global economy has not yet compensated for logistical disruptions and reduced stocks in government and commercial storage facilities. The process of this repayment is likely to keep the oil market from returning to the depressed quotes of previous years.
Переведено сервисом «Яндекс Переводчик»
