Oil on track to post weekly loss as supply outlook improves on Iran deal

Oil prices have shown signs of stabilization this week, though they remain on course for a weekly decline due to improved supply prospects following the recent U.S.-Iran deal aimed at ending their conflict and reopening the critical Strait of Hormuz. As of late afternoon UAE time on Friday, Brent crude, which serves as the benchmark for about two-thirds of the world's oil trade, was down 0.4 percent at $79.55 per barrel. Meanwhile, West Texas Intermediate (WTI), the standard for U.S. crude, fell slightly by 0.08 percent to $75.79 per barrel.

The potential for a significant weekly drop in oil prices comes as the market anticipates an increase in global supply. This expectation follows the conclusion of hostilities between the United States and Iran, which had previously led to a near-complete halt in maritime traffic through the Strait of Hormuz. The strait is crucial for transporting over 20 percent of the world's crude oil and liquefied natural gas (LNG). During the conflict, which erupted on February 28, only a handful of vessels managed to pass through the strait each day, compared to over a hundred prior to the outbreak of war. It is estimated that nearly 500 ships were stuck in the Arabian Gulf during the period of restricted access.

With the signing of the peace agreement on Wednesday, the situation appears to be improving. On Thursday, the first day of the deal's implementation, several vessels successfully navigated the strait. According to data from Kpler, a shipping analytics firm, 25 ship crossings occurred across the strait on Thursday, including one LNG tanker, two fertilizer carriers, and five sanctioned and ballast vessels. These movements marked the beginning of a much-needed resumption of normal maritime operations through the region.

Despite these positive developments, analysts caution that a complete normalization of oil flows will require time. Factors such as restarting oil fields, repairing damaged infrastructure, clearing mines, and rebuilding trust among shippers must all be addressed. Soojin Kim, a research analyst at MUFG, noted that while oil prices have largely given up the risk premium associated with the conflict, a full recovery in supply could still take some time.

In response to the easing of tensions, Kuwait, which is the fifth-largest producer within the Organization of the Petroleum Exporting Countries (OPEC), announced its intention to boost production to two million barrels per day within a week. This decision was made by Sheikh Nawaf Al Sabah, the chief executive of Kuwait Petroleum Corporation. Similarly, Iraq's oil minister, Basim Mohammed, stated that his country's oilfields are prepared to resume production, with output expected to gradually return to pre-conflict levels.

Analysts suggest that the market might experience volatile trading conditions rather than a straightforward trend. Tiago Lacerda, a market analyst at Axi, warned that the current structural risks point toward a scenario where the return of Gulf and Iranian oil supplies could potentially exceed market demand, leading to price pressures reminiscent of those seen before the conflict began.

As the situation continues to evolve, stakeholders are closely monitoring how quickly supply chains can be restored and whether the anticipated increase in oil production will meet the demands of the global market. The coming weeks will be pivotal in determining the trajectory of oil prices and the broader implications for international energy markets.