Crude oil futures saw a significant drop of almost 8% on Friday, following an OPEC+ agreement to increase oil output. The Organization of the Petroleum Exporting Countries and its allies (OPEC+) decided on Sunday to add 188,000 barrels per day (bpd) in September, completing the return of 1.65 million bpd from voluntary cuts. However, the market's reaction was muted as past quota increases have not translated into actual supply reaching buyers due to impaired shipping lanes, rendering them as mere numbers on a spreadsheet.
This selloff is attributed to market speculation about a diplomatic resolution to the Hormuz crisis, which has yet to be confirmed. Previous attempts by sellers to trade on similar diplomatic hopes resulted in the supply premium snapping back within days when shipping data failed to confirm increased flows. The current 8% drop is larger than those prior moves, even though tanker data has not indicated any changes in shipping conditions. The domestic catalyst for future market movements will be Wednesday’s EIA report, while confirmation of the selloff's validity or its exposure as another diplomatic "head fake" will come from shipping data through Hormuz and Bab el-Mandeb.
The Strait of Hormuz is a crucial chokepoint, handling approximately 20 million bpd of oil, which accounts for about 20% of global petroleum liquids consumption, and also serves as a transit point for a fifth of the world’s liquefied natural gas (LNG) trade. Revolutionary Guard forces stopped two tankers and turned back four others on Friday, while only two crude carriers managed to pass through. This ratio indicates no improvement in the shipping situation, suggesting that the 8% selloff is priced as if conditions have already improved, which is not the case. The increase in OPEC+ quotas only matters if Hormuz reopens, not while the strait operates as it did on Friday.
While some oil that had been previously stuck in the Strait of Hormuz (over 200 million barrels) was able to exit during a three-week reopening, providing some temporary relief, the current amount of trapped oil is in the tens of millions of barrels, not hundreds of millions. Furthermore, a blockade is now also affecting the Red Sea, impacting oil transported via Saudi pipelines to the Red Sea and then through the Bab-el Mandeb Strait. Alternative pipelines have a combined maximum capacity of only about 9 million bpd, falling far short of the 20 million bpd that typically transits the Strait of Hormuz, making a complete replacement of the strait mathematically impossible in the near term.
