OPEC+ meeting – no market impact
On Sunday, the seven key members of OPEC+ held an online meeting to discuss their quotas. As expected, they decided – following the extraordinary cuts implemented during the pandemic – to increase output by 188,000 barrels per day in June.
However, this is largely only meaningful on paper, as the Gulf countries remain far from meeting their quotas due to the closure of the Strait of Hormuz.
At the same time, once the Strait of Hormuz reopens, all member countries are expected to maximise production for a period until the market situation normalises. Several countries may struggle to return to pre-war production levels, as oil fields can be damaged by prolonged shutdowns.
The elephant in the room is clearly the UAE, following Monday’s announcement that it will leave the OPEC and OPEC+ cartel. In fact, the UAE was not mentioned in the press release at all. The “business as usual” approach may imply that the remaining countries are signalling that nothing has changed for the cartel.
The market is increasingly pricing a long conflict
Over the last week, the scenario we have discussed over the last two weeks – that the war, or rather the closure of the Strait of Hormuz, will be prolonged – has now been increasingly priced into the oil market. Last week, the Brent front-month contract briefly traded above USD 125. Apart from a few days in 2022 following Russia’s invasion of Ukraine, this is the highest level in 15 years.
However, this is related to the June contract, which expired during the week, and the closing of short positions at the last minute may have pushed prices unusually high. That said, the July contract has also risen significantly, now trading at USD 112.6 following yesterday's escalation. Dated Brent is trading at around USD 120.
From a market perspective, a picture is emerging of an oil market that no longer expects a quick reopening of the Strait of Hormuz. This continues to point to upside risk for oil prices in the coming weeks.
Inventory situation to tighten now
Fatih Birol, the head of the IEA, has described the situation as “the biggest energy crisis in history.” In that respect, the current crude oil price may actually appear relatively modest, not least when adjusted for inflation.
One reason the market has been able to cope with the crisis so far may be that the world entered it with relatively healthy global inventories following the oversupply in 2024 and 2025. When Russia invaded Ukraine in 2022, the actual disruption was limited, but unlike today, global stocks were significantly lower at the time.
However, even if we assume demand destruction is underway, it will be difficult to avoid a rapid drawdown of global oil inventories in May and June if the Strait of Hormuz does not reopen. Importantly, the “easy oil” – for example, oil at sea – is now more or less gone. We are already seeing this drawdown in product markets.
