Oil prices reset as stranded Gulf barrels head for market

• The market has shifted from pricing missing barrels to pricing their return, creating short-term glut concerns.
• Heavy commercial and strategic stock draws helped avoid a crisis but will eventually need to be replenished.
• Contango across parts of the Middle Eastern crude market signals temporary oversupply, not a structurally weak oil market.
• Brent gross short positions have surged to pandemic-era highs, leaving the market vulnerable to sharp reversals if supply recovery disappoints.

Oil prices have continued to retreat, with Brent crude falling below USD 76 per barrel to trade only around 7.5% above the USD 70 ceiling that capped prices before the Strait of Hormuz disruption. The move lower may appear counterintuitive given that the world has just experienced the largest oil supply disruption on record, resulting in an estimated 1.3 billion barrels of lost production from the Middle East. However, in the short term the market is no longer focused on the barrels that were lost. Instead, attention has shifted to the barrels that may soon return.

During the disruption, a combination of commercial inventory drawdowns, strategic petroleum reserve releases, alternative supply routes and demand destruction helped prevent a full-blown energy crisis. According to the International Energy Agency, global inventories have been drawn down at an unprecedented pace in recent months, helping bridge the gap created when flows through the Strait of Hormuz collapsed. In effect, the world borrowed oil from storage to maintain supply. That inventory buffer remains significantly depleted and will eventually need rebuilding. Yet despite this underlying support, crude prices are currently responding to a more immediate concern: the prospect of a short-term glut of Gulf crude returning to the market.

With shipping traffic steadily improving through the Strait of Hormuz, traders are increasingly focused on a growing queue of cargoes waiting to move. Millions of barrels are already loaded on tankers that were unable to leave the Gulf during the disruption, while hundreds of additional vessels remain positioned outside the region waiting to load. The result is a potential surge of supply entering the market at a time when buyers are showing signs of caution.

Asian refiners, which aggressively secured Middle Eastern crude during the height of the disruption, have recently slowed purchases after covering much of their near-term requirements. At the same time, major oil companies and commodity traders have stepped in to absorb some of the returning supply, taking barrels into storage or redirecting them to alternative destinations. Even so, the physical market is showing increasing signs of temporary oversupply.

This shift is becoming visible across key regional benchmarks. The forward curve for several Middle Eastern crude grades has flipped into contango for the first time since the conflict began, with prompt barrels trading at a discount to later deliveries. Such a structure typically reflects a market that is well supplied in the short term and struggling to absorb incoming volumes quickly enough.

The recent price action therefore says less about the long-term balance between supply and demand and more about the logistical challenge of clearing a large backlog of crude. Markets are effectively pricing the reopening of the supply pipeline rather than the underlying depletion of inventories.

Importantly, the return of supply is unlikely to be instantaneous. While oil may now flow more freely through Hormuz, the process of normalising trade flows, clearing vessel queues, rebuilding production and restoring customer relationships will take time. The same applies to inventory rebuilding. Commercial operators and governments that relied on strategic reserves during the disruption may eventually seek to replenish stocks, creating an additional source of demand once the immediate surplus has been absorbed.

This helps explain why we do not expect a return to the pre-war oil market environment. Prior to the disruption, Brent crude generally traded within a broad USD 60 to 70 range. While current price action is testing the upper end of that range, the medium-term outlook points to a somewhat higher equilibrium. Strategic inventories are lower, supply chains have been shown to be vulnerable, and the geopolitical risk premium attached to Middle Eastern energy exports is unlikely to disappear entirely.

At the same time, the disruption may leave a lasting scar on demand. Elevated fuel and energy costs have accelerated investment in electrification, efficiency improvements and alternative energy sources across several regions. To the extent that higher prices have encouraged permanent changes in consumption patterns, some demand destruction may prove irreversible.

Finally, speculative positioning highlights the risk that the current move has become somewhat one-sided. In the seven weeks to 16 June, managed money's net long position in Brent crude collapsed from a 7½-year high of 496,000 contracts to just 114,000 contracts. Much of that adjustment has been driven by aggressive short selling rather than long liquidation, with gross short positions reaching their highest level since the pandemic. The shift highlights how rapidly sentiment has moved from fears of prolonged scarcity to expectations of a sizeable supply surge.

Near term, crude remains exposed to further weakness as the physical market clears stranded barrels and Middle Eastern grades compete aggressively for buyers. However, a sustained return to the old pre-war Brent range of USD 60–70 looks unlikely unless demand destruction deepens materially. Inventories have been drawn down, strategic reserves must eventually be rebuilt, and the cost of securing energy supply has risen. In our view, the market is moving from crisis pricing to clearance pricing, but not back to a world where supply security can be taken for granted.