TD Securities’ Senior Commodity Strategist Ryan McKay argues that Oil fundamentals will tighten materially even if a comprehensive deal fully reopens the Strait of Hormuz. McKay projects sizeable production losses and inventory draws between June and November, with market deficits peaking in July before gradually easing into year-end, leaving Oil balances stressed despite improved Middle East flows.

Tight balances under best case reopening

"The damage is done, and oil markets will continue to tighten even under a comprehensive deal scenario. This note highlights that even under the most optimistic scenario, in which the Strait is fully reopened, the barrel-counting math still points to further material tightening in the oil market. A month-by-month outlook for fundamentals is provided below."

"An additional 1bn barrels of production would be lost between June and November and inventories would still fall another 800m barrels. Tanker logistics, travel times, and the lag in bringing production back online suggest the market would tighten this summer at only a modestly slower pace under a deal than under the status quo. Beyond August, the benefits of an open Hormuz would greatly reduce pressure on the oil market, but the damage may well be done by then."

"Be wary of the headlines. Without an actual signed deal and evidence of increased tanker traffic, our read remains that Iran is dragging out negotiations and waiting for inevitable energy market tightness to increase its leverage. Further, any form of deal or MoU [Memorandum of Understanding] that ultimately leaves Iran with functioning control of the Strait would still result in highly constrained flows and an elevated risk of continued regional conflict."

"With the cargoes that exited the Strait in June beginning to arrive at destinations throughout July and early August, we could also see an increase of 1.5-2m b/d in Asian refiner runs over this period. The still-shuttered production and constrained flows, combined with less SPR [Strategic Petroleum Reserve] flow and more Asian refiner demand would actually see the July market deficit grow to 9.7m b/d. This would be especially problematic for a market where inventory levels are expected to be hitting stress-inducing levels by July–August."

"By September and into November, production increases from the Middle East would see deficits begin to shrink notably, with production expected to return to pre-war levels by November. We assume these additional flows would continue to be exported via the Strait, with flows recovering to roughly 12m b/d and the remaining 3–3.5m b/d still moving via bypass routes at Yanbu and Fujairah."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)