Oil prices are heading for their longest losing streak this year, with global benchmark Brent falling below $83 a barrel and West Texas Intermediate (WTI) near $81, following an interim US-Iran agreement to reopen the Strait of Hormuz. This deal has increased expectations for a revival in oil supply, leading to a significant drop in prices that has erased most gains made during the conflict. The agreement, expected to be signed in Switzerland on Friday, has eased inflationary pressures just as the Federal Reserve is assessing interest rates.
Several Wall Street banks have adjusted their oil price forecasts downwards. Morgan Stanley now predicts Dated Brent to average $90 a barrel between July and September, a decrease from their earlier estimate of $100, and lowered its fourth-quarter outlook by $15 to $80. Goldman Sachs Group Inc. also cut its Brent outlook to an average of $80 for the fourth quarter, down $10 from their previous call, and now anticipates Persian Gulf exports to reach pre-war levels by the end of July, a month earlier than initially projected. Both banks cited the de-escalation of the conflict and higher oil exports via the Strait of Hormuz as key factors.
Despite the positive outlook on supply, concerns remain about the implementation of the interim pact. Questions include shipping safety, operating rules, and whether the Strait of Hormuz—which carried about a fifth of oil supply before the war—will remain toll-free. While Morgan Stanley expects 50% of production to return by September and 80% by December, RBC Capital Markets LLC is more cautious, suggesting it will take months for flows to reach pre-war levels. The effective closure of Hormuz due to the double blockade by Iran and the US has significantly cut oil flows, leading to a drawdown of commercial and strategic inventories, with the US's emergency supply reaching its lowest since 1983.
Analysts also note the importance of the deal in reducing geopolitical risk premiums that had inflated prices since February. The potential for normalized shipping through the Strait is seen as beneficial for global trade and a factor in easing inflation. However, the lack of full public details regarding the memorandum of understanding and the challenges of clearing mines, restoring marine insurance, and repairing potentially damaged infrastructure mean that the full return to normal supply flows may not be straightforward or immediate, contributing to potential continued market volatility.
