Oil Traders Stay Bearish Despite Deepening Middle East Disruptions

Despite continued hostilities in the Middle East and an expansion of the war to the Red Sea, oil traders have remained largely bearish on the commodity, betting on a quick peace deal—and they might get a nasty shock. Earlier this week, Brent crude sank below $80 per barrel, and WTI dropped below $75, after President Trump said peace talks between the United States and Iran had resumed, even though Iranian officials denied there were any talks in progress. However, Iran is negotiating a deal about control over the Strait of Hormuz with Oman, which traders apparently took as more bearish news for oil. Meanwhile, the Yemeni Houthis are striking Saudi tankers in the Red Sea, prompting yet another rerouting of Saudi oil exports to the Suez Canal and a pipeline to the Mediterranean coast of Egypt that has much smaller capacity than the East-West pipeline from the Persian Gulf to the Red Sea port of Yanbu. This would mean additional constraints on Saudi oil exports, yet traders appear to be largely oblivious to the fact. In further fresh news from the Persian Gulf, the Iranian parliament is discussing a bill to ban access to the Strait of Hormuz to U.S., Israeli, and other “hostile” vessels. That would not do much for the free passage of energy carriers in the region, and it would certainly do nothing about improving the prospect of peace between Tehran and Washington. Related: ADNOC Reports 15 Vessel Attacks as Hormuz Risks Mount Indeed, the last bit of news seems to have gotten traders’ attention and oil prices were up on Friday, reflecting the possibility of extended restrictions on tanker traffic in the Strait of Hormuz, which, it might be worth recalling, used to account for about a fifth of global oil and gas trade before the U.S. and Israel attacked Iran at the end of February. The situation is quite unique. In any oil crises in the past, futures prices have normally reflected events on the ground rather than speculation. The latest example was the oil price surge back in 2022, when sanctions on Russia from the West appeared to threaten a solid chunk of global oil flows, with Russia being a top-three exporter. When this did not happen and Russian oil and fuel flows simply redirected from the West to the East, a perception came to dominate the oil market that oil, like love, always finds a way. True as this is, this time there is literal destruction of supply—and this is what a lot of traders are ignoring. Global oil production, as of July, was 9.4 million barrels daily below pre-war levels, the International Energy Agency said in its monthly Oil Market Report. That was despite a sharp rebound of over 4 million barrels daily in June as a result of the ceasefire deal that the U.S. and Iran agreed to, and that did not even last a month. “Nearly 3 million barrels per day of refining capacity in the region has been shut due to attacks and a lack of viable export outlets,” the IEA also warned in a separate report, which has made the refined oil product situation in the world complicated. Not only this, but the amount of crude in storage in the Gulf has declined, after the flood of oil that Gulf states sent out after the ceasefire deal was agreed in June. According to Kpler data cited by Reuters’ Ron Bousso, Gulf states exported 70 million barrels of crude in the weeks following the deal. This leaves 80 million barrels still in storage. They could be released if the Strait of Hormuz reopens, but that would leave storage empty. Global supply of crude oil, in other words, is still tightening. Yet oil prices are not reflecting this. The situation is problematic because it could make a future oil price shock a lot more severe than it would have been otherwise. Analysts noted early on in the war that it takes several months for the supply tightness in crude oil to fully materialize on physical markets and affect prices. Five months after the first strikes, we are much nearer to that point of full materialization. Even so, analysts appear quite confident that the war will end soon. ING commodity analysts earlier on Friday wrote that “Despite clear signs of progress in recent days, the tenor of the rhetoric and growing distrust between the US and Iran mean things could go from bad to worse once again. For now, we hold onto our view that flows will start to normalise through the third quarter, which leaves us expecting Brent to average $80/bbl this quarter.” They are not alone in their optimism, even if there is little cause for it. Some, however, are beginning to suspect that there will not be a return to full normal, even after the end of the war, whenever it comes. Iran’s discussion of charging for ships passing the Strait of Hormuz and the idea of co-managing it with Oman suggests that post-war Middle East oil flows will be different—and while those alternative pipelines get built, prices will be higher. By Irina Slav for Oilprice.com More Top Reads From Oilprice.com