US-Iran Deal May Embolden Iran Rather Than Ease Global Oil Supply Tightness
Global crude prices have retreated to around $80 per barrel on expectations that a US-Iran deal will restore at least partial transit through the Strait of Hormuz. However, this optimism may be unfounded as the global energy market has become increasingly precarious.
The new arrangement is likely to grant Iran some influence over shipping, which would be a significant shift from the current situation where control of Hormuz has been a central issue in the conflict. The US and its regional allies have long rejected any form of Iranian control, but with over five months of severe disruption to energy exports, some Gulf producers may be willing to tolerate a compromise that restores at least part of their lost oil and gas revenue.
Traders' optimism is also fueled by the expectation of a 'flood' of crude exiting the Gulf following a reopening of the strait. However, this time around, the supply backdrop has changed dramatically. With only around 80 million barrels of oil remaining stored inside the Gulf, any 'flood' would be considerably smaller.
The market is now signaling immediate supply tightness rather than near-term oversupply, as evidenced by the premium on prompt Brent contracts for October delivery over November contracts.