Oil prices are currently experiencing a significant downturn, with Brent crude futures having erased all their wartime gains, tumbling 43% from a late April high, and physical oil markets showing their weakest signs since the COVID-19 demand collapse. This dramatic shift is attributed to a peace deal between the US and Iran, which has led to the reopening of the Strait of Hormuz and a wave of new oil supply. Over 60 million barrels of trapped oil, frozen when the war began, have been re-entering the market, overwhelming demand.
Major Persian Gulf producers like Saudi Arabia and the United Arab Emirates have rapidly increased output, with Saudi Arabia's exports nearing pre-war levels. OPEC+ members have also agreed to a modest rise in collective quotas for August, adding 188,000 barrels per day. The UAE has even re-joined OPEC during this period to ramp up flows. This influx of supply is occurring while many of the oil market's wartime workarounds, such as China's reduced purchases, are still in place, exacerbating the emerging surplus.
A significant factor contributing to the glut is the absence of Chinese demand. Chinese buyers, who stabilized the global market by drastically cutting imports by about 5 million barrels a day compared to pre-war levels, remain largely on the sidelines. Citigroup analysts, including Francesco Martoccia, note that without a meaningful return of Chinese demand, the incremental barrels will deepen the surplus. The physical price of Oman crude, a key Middle Eastern grade, has plummeted to a $4 discount to the Dubai benchmark, the largest since 2020, and a cargo of Djeno crude from the Republic of the Congo remains unsold despite a record $14 discount to Brent.
Beyond the immediate impact, analysts from Morgan Stanley to Goldman Sachs warn of a potential glut extending into 2027, with Citigroup flagging the possibility of Brent returning to $60 by year-end. While releases from strategic petroleum reserves are set to slow by August, and some anticipate governments will rebuild stockpiles, this is not enough to offset the current bearish sentiment. The question for OPEC+ producers may soon shift from how quickly they can restore production to whether they are willing to curb supply to protect prices or face a fight for market share.
As of July 6, Brent dropped another 0.4% to $71.86 a barrel, and West Texas Intermediate was down 0.25% to $68.52. Despite the overwhelming bearish sentiment, some analysts, like Homayoun Falakshahi of Kpler, believe the market is close to the bottom. The future trajectory depends on the stability of the peace deal, OPEC+'s willingness to manage supply, and China's eventual return to significant purchasing.
