The question now is how long it will take for the situation in the Persian Gulf to normalise.
Initially, one would expect the ships currently inside the Persian Gulf to move through the Strait of Hormuz. However, the agreement will not be signed until Friday, and it is unclear how many ships will pass before then. We are also awaiting announcements from insurers regarding passage.
As for oil prices, Brent has fallen by around USD 6 to USD 80 per barrel. This means that the oil price can no longer be described as high. The benchmark ICE gasoil crack has fallen by around USD 4 to around USD 38.5. It is now around USD 15 above the pre-war level, but as much as USD 35 below the absolute peak seen at the beginning of April.
We forecast that Brent will stabilise in a USD 78-82 range, or even lower, in the very short term. We may see an undershoot as speculative accounts may be forced to close long positions.
Importantly, we argue that oil prices are unlikely to return to the USD 60-70 level seen before the war.
Fundamentally, the market has borrowed a large number of barrels of oil from the future. Inventories now need to be replenished, new strategic reserves may need to be built, and there is postponed demand. This is happening at a time when it will take a long time for the market to normalise. Oil production in the Middle East needs to be restarted, and global tanker traffic needs to normalise. A larger risk premium will likely also need to be priced in over the next 60 days if the negotiations break down. Finally, the market was already prepared for an agreement. It has been that way for several weeks.
It is therefore our expectation that Brent will trade within a USD 75-100 range over the next 6 to 12 months. However, it is more likely that the market will trade in the lower end of that range.
Hedging considerations – consider a Fixed Price Agreement
This also means that buyers should consider locking in their bunker price exposure over the next 6 to 12 months following the latest price decline, especially if Brent falls further in the coming days. Note that the oil and bunker curves, including MGO, remain in backwardation, even though the price decline has been largest at the front end.
Bunker fuel prices have also fallen sharply over the last two days. We have seen a clear drop in the crack (the difference between one barrel of Brent and one barrel of fuel) for both HSFO and VLSFO, especially in Singapore. Lower cracks imply that fuel prices have fallen more than Brent.
Singapore has been most affected by the closure of the Strait of Hormuz, so it is not surprising that the price drop is the largest there.
See selected charts below and the normal charts with flat prices and curves further below.
