The benchmark crude grades of the Middle East have slumped this week as the U.S.-Iran deal raises hopes that supply from the top oil-exporting region would begin to recover soon.
As a result of the eased concerns about prompt crude supply from the region, the key benchmark crudes, Dubai and Murban, saw their futures curve structure on Tuesday flip to contango for the first time since the war began on February 28, according to data compiled by Bloomberg.
The contango structure, in which prices for contracts dated further out in time are higher than the prompt contracts, suggests that concerns about the immediate lack of crude supply have eased significantly.
The slight contango of Dubai’s contracts for July versus August compares with a peak backwardation of as much as $13 a barrel in March. Since the war began, Middle East crude curves have been in constant backwardation, the market structure where prompt crude oil prices trade at a higher premium than contracts for delivery further out. Backwardation suggests immediate physical scarcity or high geopolitical risk.
If the U.S.-Iran agreement holds and the Strait of Hormuz reopens for safe, sustainable tanker traffic, Dubai and Murban prices are set for further declines as millions of barrels of crude from the Middle East are sitting in storage on tankers in the Persian Gulf, while an open Strait would prompt producers to begin restoring production volumes they were forced to curtail early in the conflict.
Despite the major change in the Middle East futures curves, the market will probably need weeks of evidence of safe reopening of the Strait of Hormuz and resumption of consistent oil flows through the chokepoint.
The U.S.-Iran agreement could reopen the Strait of Hormuz, but shipping and oil production will not immediately return to normal. The announcement of the deal was just the first step, and it could take months for oil and gas shipments in the region to return to pre-war levels.
By Charles Kennedy for Oilprice.com
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