60 days of a broken US-Iran MoU: the market stopped waiting for Hormuz

The oil market is viewing the ongoing Hormuz Strait crisis as a prolonged issue rather than a temporary disruption. Following the US-Iran conflict, hopes for a diplomatic solution have diminished, with both nations remaining steadfast in their positions. Iran has threatened further escalation if the US fails to implement the interim deal, while the US President has declared the agreement terminated.

As a result, traders are grappling with potential shipping restrictions in the Strait of Hormuz for an extended period. This shift in perspective has contributed to crude oil prices stabilising around US$90 per barrel, although they remain approximately 50% higher than at the start of the year. While the political discourse intensifies, the economic repercussions are mounting for both parties.

Iran faces mounting pressure due to the conflict and the US blockade, with inflation surging to 80% year-on-year and crude exports plummeting to 294,000 barrels per day in July. Simultaneously, the US is confronting high fuel costs, a stance that contradicts its campaign promises. Despite the diplomatic stalemate, the oil market is adjusting accordingly.

The primary uncertainty revolves around the extent of supply constraints. With flows through Hormuz dwindling to an average of 2 million bpd this month, alternate routes such as those from the UAE and Saudi Arabia are also under threat due to the Yemeni Houthi blockade in the Bab el-Mandeb Strait. Consequently, global Middle East exports have averaged 9.5 million bpd this month, a stark contrast to the 21 million bpd last year.

However, these statistics may either underrepresent or overrepresent the actual export volumes due to the emergence of 'dark tankers' in the Gulf of Oman. The inventory situation is concerning, with global observed oil stocks declining by 2.4 million barrels in the second quarter, the largest quarterly draw in over a decade. US diesel inventories are at a three-decade low, while gasoline stocks are at their weakest seasonal level since 2012.

Freight markets have also reflected the situation, with benchmark rates for large crude carriers transporting oil from the Middle East to China surging from US$300,000 per day to US$490,000. The prolonged Hormuz impasse is increasingly indicative of a structural transformation in global oil trade rather than a fleeting supply shock.