Oil: Market looks through Hormuz risks – MUFG

Michael Wan at MUFG notes Brent has dropped below US$80 as hopes rise for a deal to reopen the Strait of Hormuz. He stresses that Oil prices have been more benign than supply headlines imply, helped by weaker Chinese imports and substitution via coal-to-chemicals and electrification, though he warns that weather shocks such as a potential Super El-Nino remain a risk.

Brent pressured despite conflict risks

"In what seems like this continuous feature in the US-Iran conflict of escalation and de-escalation, we saw Brent oil prices fall sharply at the time of our writing below US$80/bbl, as hopes grew around a possible deal to reopen the Strait of Hormuz."

"In particular, US Treasury Secretary Scott Bessent said in an interview with CNBC that there is a chance there could be a deal “by today or tomorrow to open the strait”, and Qatar said a proposed de-escalation resolution was “being circulated between the parties”, although they cautioned that a solid agreement has not been reached yet."

"Meanwhile, Iran is considering allowing European nations to remove mines from Hormuz, according to diplomats familiar with the matter."

"Overall, markets are trying their best to look through any potential re-ignition in the conflict towards the final destination – and perhaps rightly so."

"Oil prices have thus far been more benign than headline oil supply disruptions suggest, and some of the resilience in the system has been helped by a much sharper than expected drop in oil imports from China."

"This in turn may partially reflect some drawdown in inventories, but more importantly for the path forward could also be driven by the availability of the coal-to-chemicals process in China coupled with the ability to switch towards electrification rather than just rely on oil."

"As such the world has been far more resilient than expected thus far, and may continue to be, but over here there are certainly shocks moving forward including a likely “Super El-Nino” event later this year."

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