Oil prices have been highly volatile, with Brent crude for October initially dropping over 7% to below $83 a barrel before recovering some losses. This fluctuation follows US President Donald Trump's decision to call off a planned attack on Iran and his announcement of new talks with the Islamic Republic. Despite earlier indications, the market currently signals immediate supply tightness, as prompt Brent contracts for October delivery trade at a premium of $1.50 a barrel compared to November contracts.
Oil traders are increasingly focusing on prompt contracts, struggling to assess the evolving conflict. The expectation of a rapid rebalancing of supply now seems as unlikely as it did in June. The structure of the Brent futures curve reflects this, with the prompt contract having slipped into a small discount to the next month shortly after a June agreement, a structure indicating anticipated near-term oversupply.
The reopening of the Strait of Hormuz is imminent, a key factor shaping market response. Capital Economics anticipates that commercial oil inventories could near critically low levels in Q3, despite 400 million barrels of emergency stocks released by the International Energy Agency. This buffer is expected to run out by mid-September. To prevent further tightening, Middle East exports would need to increase by 2-3 million barrels per day, or the IEA would need to authorize another strategic reserve release.
