Global Oil Market Faces New Challenge as Supply Surpasses Demand After Hormuz Strait Reopening
Global oil prices have sharply declined following a memorandum of understanding signed at the end of June between the United States and Iran, which included reopening the Strait of Hormuz for shipping. This development has flooded the oil market with supply exceeding demand, pushing Brent crude prices down to $68.8 per barrel and raising concerns about a significant surplus in the near future.
During the recent conflict, oil prices peaked at a historic $112 per barrel, with industry leaders warning of dangerously low global oil inventories that could trigger a worldwide recession. However, despite uncertainties about the durability of the US-Iran agreement and incomplete restoration of Middle Eastern oil production, Brent futures have erased all wartime gains, dropping 43% since late April. Physical oil markets are showing unprecedented weakness not seen since the COVID-19 pandemic.
Key factors driving the oversupply include the reopening of the Strait of Hormuz, lifting of US sanctions on Iranian oil, release of over 60 million barrels from US emergency reserves, and China's decision to halt new oil imports while relying on its emergency stockpiles. Dr. Eili Retig, an energy and security expert at Bar-Ilan University, highlighted China's move as a major cause of the rapid price drop, noting that millions of barrels are now available to a market that does not currently need them.
Economist Rinat Ashkenazi from Phoenix Investment House described the market shift as moving from scarcity to an "excessive abundance," driven by simultaneous factors including emergency stock releases, faster-than-expected recovery of oil flow through Hormuz, and early return of Iranian exports. OPEC countries have resumed pre-war export levels, intensifying concerns about oversupply in the second half of the year and possibly into 2027.
The surplus is visible in global trade, with oil tankers from the UAE and Venezuela facing difficulty finding buyers, some waiting weeks without sales despite steep discounts. The physical price of Oman crude has fallen $4 below Dubai crude, the widest gap since 2020. The futures curve has shifted to contango, encouraging producers to store oil and sell later at higher prices.
Ashkenazi explained that the plunge in energy prices reduces inflationary pressures globally, acting like a tax cut for consumers and supporting economic growth. However, for oil-exporting countries, the situation is complex, as they may need to cut production to support prices or compete for market share. The future depends largely on China's demand recovery and the need for countries to replenish reserves. The easing inflation pressures also provide central banks, including the Federal Reserve, with more flexibility in monetary policy decisions ahead.
Overall, the oil market is undergoing a dramatic transition from shortage to surplus, with significant implications for global economics and energy geopolitics.
