| Commoditiy | Price | Weekly Change | 50day-Ave | 100day-Ave | 200day-Ave |
|---|---|---|---|---|---|
| Brent ($/b) | 80.05 | -3.12 | 98.62 | 93.24 | 78.66 |
| US WTI ($/b) | 77.20 | -7.68 | 93.91 | 87.95 | 73.98 |
| ICE Gasoil ($/MT) | 904.75 | -29.00 | 1,119.35 | 1,074.48 | 877.41 |
| Jet CIF NWE ($/MT) | 951.68 | -39.90 | 1,248.61 | 1,220.31 | 969.21 |
Brent traded under 77 \$/b last week, after the US and Iran finally reached an agreement on an initial deal.
The agreement is undoubtedly the most meaningful progress made towards resolving the disruption to energy supply made since the war started. However, in contrast to the commitment made by Iran in point 8 of the MoU (Memorandum of Understanding)in which they will “not procure or develop nuclear weapons” which sets a clear principle for the detailed talks that will follow and the nature of the final agreement to be reached at the end of it, point 5, which deals with shipping through the Strait of Hormuz, commits Iran only to allowing toll free access to the Strait for 60 days, but beyond that says “Iran will conduct dialog with the Sultanate of Oman to define the future administration and maritime services in the Strait of Hormuz”. This allows for the possibility that Iran could in the end be left in a position of being able to exert control over the Strait and charge tolls for access. In any case, over the weekend the conflict in Lebanon, has continued in spite of a ceasefire announced between Israel and Hezbollah last week, and led to Iran saying it has “closing” the strait again. Point 1 of the MoU which makes the deal conditional on a ceasefire, not just between the US and Iran, but also their “allies”, is explicit that it applies to the conflict in Lebanon. That conflict continues, but fortunately has not stopped detailed talks between Iran and the US commencing, but consider the situation from the point of view of the owner, insurer or captain of a tanker carrying 2million barrels of crude: a high tolerance for risk and a close relationship with the Iranian authorities is likely to be a prerequisite to set sail as things currently stand. There has been some movement of shipping, but things are certainly not back to anything like “normal” as freedom of navigation in the Strait would have been understood before the war started. Nor is there yet any clear pathway to reaching that point. The end of the US naval blockade is enabling Iran to resume oil exports.
The International Energy Agency (IEA) published its latest monthly report last week where it has revised down its 2026 demand estimate by 700 kb/d, from 104 to 103.3 mb/d, due to the impact of high prices and oil scarcity on demand. The quarterly breakdown shows downward revisions to all quarters, except for Q4 where the demand estimate has been increased by over 1 mb/d to 106.6 mb/d. The IEA has also extended its forecast to 2027 with its demand forecast of 105.3 mb/d, which is almost 1 mb/d above 2025. This suggests the IEA does not see any lasting impact or structure changes in demand due to the war. The month-on-month comparison of the supply breakdown is complicated by the UAE having left OPEC. Cutting to the chase though, the IEA sees the amount that OPEC needs to produce to balance the market in 2027 (the call at OPEC) as being 22.3 mb/d. The IEA sees May OPEC output at 16.4 mb/d, down nearly 1 mb/d on April, mainly due to a fall in Iranian output as the US Naval blockade took effect in that month. What can we say about the balance of the market in 2027 in view of the IEA's call on OPEC of 22.3 mb/d? As we have the 2027 estimates from the IEA, we can begin considering the balance of the market in 2027. If flows of energy through the Strait of Hormuz normalises over the coming months, OPEC members that are subject to quotas might reach them and produce around 20 mb/d. In addition, there is Iran, Libya and Venezuela that are not subject to quotas and could add another 6 mb/d. In total, this is 26 mb/d, nearly 4 mb/d above the IEA's estimate of the call on OPEC, suggesting a very oversupplied market. So, the oil market is currently pulled between the opposing forces of short-term shortages and a reliance on inventory, but longer-term oversupply. This could argue for a more sharply downward sloping forward curve than we currently have, but the need to rebuild depleted inventories is a pressing one and this can help to absorb oversupply into next year and support prices. Another point the IEA observed in their report is that they observed an acceleration of the rate of inventory withdraws in May, to 143 mb (~4.6 mb/d) from 74 mb (~2.5 mb/d) in April. OECD government inventories fell by 163 mb (~1.8 mb/d) over the same period to their lowest level since December 1990.
Brent is now down to the 200-day moving average at around 79 \$/b. There continues to be friction over the conflict in Lebanon, which has not ended as the terms of the MoU require, and Iran has said it has “closed” the Strait again in response. The market has been taking this in its stride so far, but with Brent at less than 10 \$/b above the pre-war range in spite of the risks that remain and the significant drawdown in inventories seen in recent weeks, the market could be prone to spiking higher again.
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