Oil prices plunged on Thursday to pre-war lows as recovering traffic in the Strait of Hormuz raised fears of a Middle Eastern supply glut amid already sluggish demand.
Prompt-month Brent crude futures for August delivery shed $1.28, or 1.74%, to trade at $72.46 a barrel by mid-morning GMT, while U.S. West Texas Intermediate fell $1.15, or 1.63%, to $69.19 a barrel.
Both benchmark contracts touched their weakest levels since February 27, the day before U.S. and Israeli forces launched the military campaign that plunged the world’s most critical oil corridor into chaos.
The proximate trigger for Thursday’s selloff was a striking disclosure from Washington. U.S. Energy Secretary Chris Wright, speaking at an industry forum, told delegates that crude flows through the Strait of Hormuz, the narrow chokepoint through which roughly a fifth of the world’s oil passes, had recovered to near pre-war levels, with at least 20 million barrels having transited outbound through the waterway in the preceding 24 hours alone.
The announcement amounted to a turning point that markets had been bracing for ever since last week’s landmark accord brought the six-week U.S.-Israeli military campaign against Iran to a halt.
The ceasefire agreement, which established a 60-day window for negotiations on harder-edged issues, including Iran’s nuclear ambitions, has steadily unlocked the sea lanes that Tehran had mined and effectively sealed during the conflict.
Wright was careful, however, to temper expectations of an overnight return to normalcy. “A return to complete normalcy would take a few weeks,” he cautioned, citing the need for ongoing demining operations before commercial shipping could move freely and safely.
He struck a notably firm tone on one point: Iran, he insisted, would not be able to shut the strait again, a signal clearly intended to reassure energy markets that the era of supply disruption risk emanating from Hormuz had, for now, drawn to a close.
Analysts were quick to add nuance to the recovery narrative. Giovanni Staunovo, a commodities analyst at UBS, noted that while outbound traffic ships leaving the Gulf had surged impressively, the picture for inbound flows remained far more cautious.
“Most of the increase in flows from the Gulf is outbound ships exiting the Strait,” Staunovo observed. For inbound traffic to recover meaningfully, he argued, the shipping industry would need more than a diplomatic handshake.
Safety assurances, comprehensive mine clearance, and crucially, a normalization of war-risk insurance premiums would all be required before tanker operators were willing to sail back into the Gulf in meaningful numbers.
Those premiums, which had spiked to punishing levels during the conflict, remain a significant deterrent and could weigh on the pace of recovery for weeks to come.
In a practical move to ease the logjam, Oman opened temporary navigational routes on Wednesday, coordinating with the International Maritime Organization to manage tanker departures from the strait in an orderly fashion, a recognition that even as diplomacy advanced, the logistics of reopening a heavily contested waterway would require patient, methodical management.
Beyond the mechanics of the strait’s reopening, markets are also grappling with the broader question of Iranian crude returning to the global supply mix. Tehran is widely expected to aggressively ramp up oil exports following a reprieve from U.S. sanctions, a prospect that, combined with renewed Gulf flows, has driven down the price of physical crude cargoes in markets from the Mediterranean to Asia.
Yet Goldman Sachs urged restraint in that calculation. The Wall Street bank said it does not anticipate a substantial increase in Iranian production, even in a scenario where sanctions relief is extended beyond its current August 21 expiry date.
The reasoning is structural: with European Union and United Kingdom sanctions on Iranian oil and Iranian-linked vessels still firmly in place, China is set to remain the dominant and largely sole buyer of Iranian barrels. That limits the breadth of any Iranian supply surge, even if the volume heading east grows.
As if the supply picture were not already complex enough, fresh tremors emerged within OPEC on Thursday. A senior Iraqi oil ministry official told Reuters that Baghdad would be forced to “consider all options” if its production quota within the cartel was not significantly increased, language that, in the diplomatic lexicon of oil politics, is rarely used idly.
The warning carries particular weight given the backdrop: the United Arab Emirates stunned the organization earlier this year with a surprise withdrawal, a defection that has left OPEC visibly shaken.
Iraq, one of five founding members of the group, which was itself established in the Iraqi capital of Baghdad, abandoning the cartel would represent a far more seismic blow, both symbolically and in terms of production capacity.
The prospect of a second major exit in rapid succession has introduced yet another layer of uncertainty into a market already navigating the post-war recalibration of Middle Eastern supply.
Whether OPEC can hold its fractious membership together in the months ahead may prove just as consequential for oil prices as the speed at which a deminer’s vessel clears the last mine from the floor of the Strait of Hormuz.
WHAT YOU SHOULD KNOW
Oil prices have dropped to pre-war lows as the Strait of Hormuz reopens and Middle Eastern supply rebounds, but don’t mistake movement for full recovery. Shipping confidence remains fragile, insurance premiums are still elevated, and demining operations are ongoing.
Iran’s return to the market is real but limited, with China its only meaningful buyer. Meanwhile, OPEC is quietly fracturing, with Iraq threatening to follow the UAE out the door.
