Key parts of the oil market are suddenly awash in supply, as a stream of cargoes out of the Strait of Hormuz accelerates after the U.S.-Iran agreement to open the waterway. Markets are weakening across Europe and Asia as buyers find themselves inundated with offers for cargo, according to traders and Bloomberg News reports.
Angolan Crude Discounts Signal Oversupply
In one of the most dramatic examples, Angolan crude—a grade typically snapped up by China—has been selling at the biggest discounts in more than a decade, at times changing hands at nearly US$10 a barrel below the global Dated Brent benchmark. Some Chinese refiners have actually been offering oil cargoes for sale, a stark reversal of normal flows, traders say.
The discounts in Angola show how the global physical oil market has lurched in just a couple of months from significant tightness to flashing signs of oversupply. Middle Eastern crude has been trading since mid-month in a bearish contango structure that signals oversupply, and the global Brent benchmark flipped over on Wednesday. A day later, benchmark futures prices wiped out all of their gains since the war started.
Prices Halve from War Highs
In early April, the price of the world’s most important physical oil benchmark, Dated Brent, topped US$140 to hit the highest level on record, buoyed by panic buying during the Iran war. Now, that same gauge has roughly halved in value and is close to the same level it was at when the war began.
“You actually get a discount to buy a barrel now versus a barrel tomorrow because of the weakness in the Asian pull on Middle Eastern grades,” said Daan Struyven, co-head of global commodities at Goldman Sachs Group Inc., in a Bloomberg TV interview. “Reopening is going well and quickly.”
Pre-Deal Factors Contributed to Oversupply
Even before the U.S.-Iran interim peace deal, a combination of strategic inventory releases, a collapse in demand from top buyer China, and a substantial number of tankers sneaking “dark” out of the Persian Gulf had contributed to a small oversupply in some key markets, traders say. Millions of barrels a day had begun quietly sneaking into global markets, including supplies from the United Arab Emirates and Kuwait, with help from the U.S. military.
The UAE in particular quickly ramped up dark shipments through the war, and the International Energy Agency (IEA) estimated this week that its total oil exports reached almost 85% of prewar levels by early June, ahead of the agreement to reopen the strait more formally.
Outlook: Surplus and Inventory Refill
The drop has brought back the prospect of the significant oversupply that was expected to dominate oil markets this year, with the IEA last week forecasting a significant surplus in 2027. Still, much of the oil market’s success in solving the problem of supply disruption through Hormuz has come at the expense of inventories that will need to be refilled, potentially soaking up some of that oversupply.
