Global oil prices have collapsed back to pre-war levels, trading down near $70 per barrel, with a potential peace deal between the U.S. and Iran helping calm global markets and prompting the removal of massive war risk premiums from energy valuations. However, oil prices edged higher on Monday, with Brent crude for August delivery climbing 0.74% to trade at $72.54/bbl at 9.25am ET, with escalating military tensions between the United States and Iran sparking fresh fears of shipping disruptions in the vital Strait of Hormuz.
And now, ING Research says the selloff is likely overdone, with the market too optimistic about the prospects of a quick resumption of normal oil flows through the Persian Gulf. First off, tit-for-tat strikes between the U.S. and Iran over the weekend have highlighted the fragility of the 60-day ceasefire, threatening market hopes for a quick resolution and normalization of global energy flows. Second, financial and physical indicators suggest that the broader market has heavily overshot to the bearish side. Buyers have continued to defer oil purchases, with refiners drawing down their existing on-site stocks rather than buying new crude as they wait for oil prices to fall further.
China’s crude oil imports have plummeted nearly 30% Y/Y to just 7.8 million barrels per day (bpd), representing their lowest levels since 2018. Weak demand by China has helped keep global oil prices in check. However, Kpler has projected that China’s crude oil imports and broader demand could recover as early as August.
Brent has been trading at a steep discount compared to future contracts. Because physical oil is cheaper today than in the future, buyers are incentivized to store crude rather than consume it immediately, while refiners draw down existing inventories in anticipation of lower prices. However, analysts have warned that continuous inventory drawdowns are unsustainable, meaning sustained restocking might eventually force the curve to flatten.
Finally, speculative gross short positions held by money managers on ICE Brent have soared to historic highs, increasing the selling momentum but also creating the perfect conditions for an oil price short squeeze.
By Alex Kimani for Oilprice.com
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