US-Iran Escalation Could Threaten 2027 Oil Market Surplus, IEA Says

The IEA said ⁠global oil supply rose by 4.1 million bpd in June, but remained 9.4 million bpd below pre-war levels. Global oil markets received some respite last month as a peace agreement between the US ​and Iran facilitated the opening of the Strait, the effective closure of which had taken out as much as 14 million ​barrels per day of crude flows during the peak of the largest oil supply crisis in history.

Lasting peace deal needed for normalisation

The ​agency predicts supply will expand by 7.5 million bpd next year after a 3.7 million bpd contraction this year, but that is contingent on ​improved Hormuz transits. "An escalation in hostilities on 7-8 July, however, clouds the outlook and could upend the forecast that sees the market flipping to a surplus next year," it said, adding that a lasting peace agreement is a "must" for oil markets to normalise.

The IEA's 2027 forecasts imply that supply will outweigh demand by 4.62 million ​bpd next year from an 860,000 bpd deficit this year, provided producers can restart fields and refiners can resume normal product shipments.

The Paris-based ​agency, which advises industrialised nations, sees global oil demand falling by 1 million bpd this year, before rebounding to rise 2 million bpd in 2027. In the nearer ‌term, ⁠it sees the peak summer fuel demand season, together with lower prices, lifting consumption by around 8 million bpd when compared with May's low point at the peak of the crisis. "Much lower oil prices are also incentivising growth in oil use, as is a brightening economic outlook," it said.

Brent crude futures were trading slightly lower on the day on Friday at US$75.85 by 0934 GMT. Rival forecaster OPEC will release its own monthly oil ​market report on July 13.

Refining church Buoys fuel margins

Refining activity and ⁠oil product shipments were slower to react to the reopening of Hormuz than crude oil exports, the IEA said, which combined with the peak summer demand season has tightened the market for refined fuels and pushed ​up refining profit margins. "The disconnect between apparently well-supplied crude oil markets and tight product markets underpinned a ​rally in cracks ⁠and refinery margins to four-year highs by early July," it said. Concerns over jet fuel shortages have been replaced by worries about tightening supplies of gasoline and diesel, the IEA added.

Diesel markets in the Atlantic basin have tightened rapidly in recent weeks due to restricted Middle East output being compounded by a ⁠collapse in ​Russian exports, as Ukraine intensified its attacks on Russia's refining infrastructure. Meanwhile, the flood of crude ​oil on the water sailing to destinations after Hormuz reopened saw global inventories rise for the first time in four months in June, the IEA said, by 21 million barrels. ​That comes after a cumulative 360-million-barrel draw in stocks over the March to May period. - The Business Standard