Oil prices mixed: WTI, Murban see modest rebound as Brent slides to $71.99/barrel
Analysts say selloff overdone as fragile truce collides with heavy short positioning
Global oil prices have fallen back toward pre-conflict levels near $70 a barrel after the US-Iran peace agreement holds, easing fears of conflict and stripping massive risk premiums from energy markets.
Prices were mixed early on Tuesday (July 7) with Brent crude futures down 0.18% to $71.99/barrel, even as Gulf oil producers ramp up crude exports amid the 60-day ceasefire.
In contrast, WTI crude for August delivery rose 0.38% to $68.81 a barrel by 9:50 am Tokyo, while Abu Dhabi-based benchmark Murban crude rose 0.30% to $66.68/barrel, as per OilPrice.com market data.
This comes amid the on-going funeral march for Iran's slain Supreme Leader Ayatollah Ali Khamenei, which has drawn millions of mourners.
Absent the military tit-for-tat strikes between the United States and Iran, oil prices have have dropped significantly due to easing geopolitical tensions, a quicker-than-expected recovery of shipping through Hormuz, and broader OPEC+ production increases.
The primary drivers behind the recent price drop include:
De-escalation in the Middle East: Crude prices have tumbled from recent highs as indirect peace talks between the US and Iran have successfully lowered the geopolitical risk premium.
Resumption of Gulf Oil shipments: Tanker traffic and commercial shipping are returning to the critical Strait of Hormuz. Major Gulf producers like Saudi Arabia and Kuwait are ramping up daily exports to restore supplies.
Increased production targets: OPEC and its allies agreed to raise output targets to calibrate production and stabilise the market, shifting expectations from a supply shortage to a potential glut.
Weakening global demand: Growing concerns over a struggling US economy, combined with sluggish import demand from China, have further suppressed crude values.
Analysts caution selloff was overdone
ING Research, however, said the recent sharp selloff appears "excessive", with markets overly optimistic about a rapid return to normal oil flows through the Persian Gulf.
The firm pointed to several factors signaling the market has swung too far to the bearish side:
Buyers have deferred purchases, with refiners drawing down existing stocks rather than buying new cargoes in hopes of even lower prices.
China's crude oil imports dropped nearly 30% year-over-year to 7.8 million barrels per day — the lowest level since 2018 — reflecting weak demand that has helped suppress global prices.
Data firm Kpler projects a potential recovery in Chinese imports and demand as soon as August.
'Contango'
Brent crude has traded at a steep discount to future contracts, a market structure known as "contango" that encourages storing oil rather than consuming it immediately.
Analysts warn that ongoing inventory drawdowns by refiners are "unsustainable" and could lead to restocking that flattens the futures curve.
Speculative money managers have built record gross short positions on some benchmarks, amplifying downward pressure but also setting the stage for a potential short squeeze if sentiment shifts.
The developments come against the backdrop of heightened US-Iran tensions that had previously driven war-risk premiums into oil prices.
Following the funeral of Iran supreme leader, market watchers will be keeping an eye out for any risks of renewed disruptions in the region, which accounts for a significant share of global oil supply.
Signs of diplomatic progress or further escalation could sway the delicate balance between oil trade and geopolitical risks.
