Hormuz oil exodus sets stage for chaotic rebalancing act

Crude prices may be back near levels seen before the Iran war, but the surge in oil exports from the Middle East following the reopening of the Strait of Hormuz is creating a chaotic market that could take months to settle, Reuters reported.

The steep slide in Brent crude back to pre-war levels of around $73 a barrel following the U.S.-Iran interim deal might, ​at first glance, suggest business as usual has returned to the world’s most important oil and gas hub. The narrow waterway, which once carried about a fifth of global oil and ‌gas, had been effectively paralysed by conflict for more than 100 days.

But beneath the surface, the market is anything but orderly. What looks like normality is a system trying to reboot all at once.

First, there’s the race to liberate trapped volumes. Dozens of tankers stranded inside the Gulf during the war have rushed to leave in recent days.

U.S. Energy Secretary Chris Wright said flows briefly exceeded pre-war levels of around 20 million barrels per day, though ship-tracking data suggests overall traffic remains far below the roughly 125 daily crossings seen ​before the conflict. Some vessels appear to be disabling tracking systems during transit, further clouding the picture.

Whatever the precise numbers, one thing is clear: more Middle Eastern oil is hitting the market.

But clearing outbound cargo ​is only half the equation.

Inbound tankers are needed to load crude sitting in onshore storage, a key step in allowing producers to restart fields and refineries shut during ⁠the war. Without that inflow of vessels, the recovery in supply cannot proceed smoothly.

This dynamic is particularly acute for producers such as Kuwait, Iraq, Bahrain and Qatar, which have few, if any alternative export routes.

The constraint should ​be short-lived. Consultancy Rystad Energy estimates that shut-in production across the Gulf fell to 9.6 million bpd by mid-June from 11.7 million bpd three weeks earlier, and the region is now expected to return to pre-war output by December.

Perhaps ​an even bigger factor complicating the supply outlook is Iran. Tehran is expected to quickly ramp up oil production after the U.S. suspended most sanctions restricting Iran's oil exports and sales.

Iran's oil output could reach 3.3 million bpd by year-end, above pre-conflict levels, if the sanctions relief stays in place, according to Rystad.

Logistics aside, a flood of oil appears likely to hit markets.