Crude Extends Losses on Glut Fears
Oil extended its run of declines on growing signs of oversupply, with traffic through the Strait of Hormuz recovering and some of the impacts of the Iran war continuing to fade.
West Texas Intermediate fell 1.3% to settle under $69 a barrel, while Brent settled near $72. US negotiators made progress in indirect talks with Iran, US President Donald Trump said. Preventing a return to active conflict would likely ensure oil continues flowing through the strait, helping send prices lower.
Futures dropped further following a US Department of Energy report that showed crude inventories declined by around 2 million barrels fewer than what had been projected by the American Petroleum Institute. Still, overall supplies are well below their typical levels. Total crude stockpiles are at their lowest since September 2018 after American exports surged to help fill the gap of lost Middle East supply.
But bearish sentiment continues to dominate the market. Brent's nearest timespread remained in contango -- a sign of oversupply -- while WTI drew closer to signaling oversupply for the first time since November.
"Inventories remain historically tight, but the market is increasingly looking beyond today's stock levels and focusing on the fact that we've likely passed the peak inventory draw cycle," said Rebecca Babin, senior energy trader at CIBC Private Wealth Group. "The market is beginning to price the inflection point -- from maximum inventory draws toward a gradual return to surplus."
Meanwhile, physical markets remained weak. Barrels from West Africa to the North Sea were offered at multiyear lows on Tuesday, as the rise in supply from cargoes transiting the Strait of Hormuz outpaces refinery demand. Saudi Arabia is making rare spot sales of oil as the kingdom's shipments ramp up, and key US oil grades slumped to trade at a discount again this week.
Commercial shipping through Hormuz has surged in recent weeks, with US military support helping boost oil flows over 10 million barrels a day. The rapid uptick has caught Tehran off guard, according to a US official.
Crude has fallen as the warring parties continue discussions to reach a lasting accord. Oil tanker traffic is showing signs of recovery and has picked up since the US and Iran exchanged strikes over the weekend. Vessel flows remain below prewar levels, however.
"We expect that by the end of July this is done," said Samantha Dart, co-head of global commodities research at Goldman Sachs Group Inc., referring to the conflict. "Once we have a normalization of flows through the strait, the expectation is that we go into an oversupply."
Goldman Sachs pegs the surplus at close to 2 million barrels a day next year, even after accounting for restocking of global strategic petroleum reserves following the Iran war. Morgan Stanley has also warned of a looming glut as flows through the strait return faster than expected. The bank cut its price forecasts for the second time in about two weeks.
Markets are now contending with a gush of crude from other sources, too. Iran said it exported more than 40 million barrels of oil since the US lifted its naval blockade, while Russian shipments are surging to records, causing a major buildup of barrels at sea.
Iran has reiterated its determination to control maritime traffic through the strait, a reminder that key sticking points -- including over the country's nuclear program and an end to fighting in Lebanon -- remain in place and stand to complicate discussions during the 60-day ceasefire window.
Oil Prices
- WTI for August delivery dipped 1.3% to settle at $68.58 a barrel.
- Brent for September settlement fell 1.9% to $71.57 a barrel.
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