(Bloomberg) — Oil briefly touched a fresh three-month low before recovering, with prices still broadly pressured by a looming US-Iran deal that threatens to send barrels gushing back onto the market.
Most Read from Bloomberg
West Texas intermediate fell below $75, before turning higher after a series of declines. US President Donald Trump said that if he didn’t like what he saw from Iran he would strike the country again. An interim peace deal between the two countries, which is due to be signed on Friday, offers Tehran broad financial incentives, including the right to sell its oil immediately, and has sparked a precipitous selloff in crude.
Shipowners are gearing up for the reopening by repositioning vessels toward the Middle East. Any eventual resumption could also lead to the release of more than 100 laden ships with oil from Middle East countries other than Iran that are stuck inside the Gulf, effectively acting as a stockpile release on the market.
The prospect of a gush of supply is showing up in major market gauges. Key timespreads in the Middle Eastern Dubai market have already plunged into the bearish contango structure that signals oversupply. Brent’s nearest timespread was on a similar path earlier on Wednesday.
The International Energy Agency warned on Wednesday that the conflict is causing a bigger hit to demand than previously thought, while adding in its first look at next year’s balances that it expects a renewed glut.
Crude prices are down by almost 40% from their peak during the conflict as moves to end the war between Washington and Tehran are seen easing tightness in global energy markets. Producers, shippers and traders are now assessing whether the agreement will prove to be durable, and how long it will take for vessel transits of the Hormuz chokepoint to be revived in earnest. But the scale of the drop is already quashing the risk of an energy-induced inflationary spike.
“This decline is not merely a reduction in the geopolitical risk premium; it is a recalibration of the global oil balance for the months ahead,” said Tamas Varga, an oil analyst at brokerage PVM. “With oil prices tumbling, inflation expectations are likely to decline, while increases in consumer and producer prices should moderate.”
In addition to the extra supply, the selling pressure that has hit oil markets has been compounded by a clutch of factors. Technical traders have added to bearish wagers and Brent on Wednesday fell below its 200-day moving average for the first time since February.
