"Worst-Case Scenario Avoided"... International Oil Prices Hit a Three-Month Low Ahead of MOU [Iran Ceasefire Signature Nears]

As the United States and Iran move toward signing a Memorandum of Understanding (MOU) centered on extending the ceasefire and denuclearization, the global economy has at least avoided the worst-case scenario for now. Concerns over a supply shock from the Middle East have eased, sending international oil prices to their lowest level in three months. However, reopening the Strait of Hormuz does not immediately mean supply chains will return to normal, so it could still take considerable time before market anxiety is fully resolved.
According to the international financial market on the 14th, Brent Crude Oil futures for August delivery closed at $87.33 a barrel on the 12th, local time, down 3.37% from the previous session. West Texas Intermediate crude oil (WTI) futures for July delivery fell 3.23% to $84.88. Dubai crude plunged more than 6% to $83.18. Brent Crude Oil is at its lowest level since March 5, while WTI is at its lowest since April 17.
It is the first time since March 4 that all three benchmark crude grades have fallen below $90 a barrel. At that time, the United States and Iran were engaged in combat, and Dubai crude stood at $86.34, Brent Crude Oil at $81.40, and WTI at $74.66.
The decline in oil prices was driven by expectations that ceasefire talks between the United States and Iran were in their final stages. The market believes that if the Strait of Hormuz reopens, concerns over disruptions to Middle East crude supplies will ease significantly. Analysts also say that if energy price pressures, which recently led the rise in U.S. consumer inflation, subside, the monetary policy burden on the Federal Reserve System (Fed) and the Bank of Korea could ease somewhat.
In fact, energy was the key driver behind the recent rise in U.S. inflation. In May, U.S. energy prices rose 3.9% from the previous month, while gasoline prices jumped 7.0% in a single month. The United States Department of Labor said energy prices accounted for more than 60% of the monthly increase in the Consumer Price Index (CPI). As a result, if international oil prices continue to fall, they are expected to act as a moderating factor in the inflation outlook ahead.
■ Production normalization will not happen quickly
However, reopening the strait and restoring supply are entirely different matters.
First, because hundreds of ships are believed to have been stranded in the Persian Gulf during the war, bottlenecks are likely to persist for some time. Even if the strait reopens, tankers trapped inside must leave first, and only then can vessels carrying crude oil enter. Energy columnist Javier Blas noted, "Ships trapped in the strait will have to exit while new ships enter at the same time," adding, "There is no precedent for this situation, and there is no manual for it."
■ Oil inventories are another variable
It will also take time for oil-producing countries to normalize production. Major Middle Eastern producers have limited output to account for transport disruptions during the war. In this regard, Kuwait Petroleum Corporation estimated that even if the Strait of Hormuz reopens, it would take six to eight weeks to recover about 70% of crude production. It said another month or so would be needed to fully restore the remaining output.
Reduced oil inventories during the war are also a factor. According to the International Energy Agency (IEA), global oil inventories fell by about 250 million barrels from the start of the conflict in February through May. If governments and refiners later move to buy crude in order to replenish strategic reserves and commercial inventories, additional demand could emerge and limit the pace of oil price declines.
Above all, uncertainty remains because the current drop in oil prices already reflects expectations of a ceasefire. Citing ING analysts, the United Kingdom press reported that if the talks ultimately collapse or the resumption of crude supply is delayed, international oil prices could surge to as high as $120 to $130 a barrel.


whywani@fnnews.com Hong Chaewan Reporter