The upcoming increase in oil prices may occur sooner than traders anticipate.

Oil prices have reverted to pre-war levels since the U.S. and Iran began negotiations for a deal that involves reopening the Strait of Hormuz.

With oil exports from the Middle East beginning to resume, analysts, investment banks, and traders anticipate a global oil surplus might return as early as 2027, leading to further declines in oil prices.

Many analysts predict prices could drop to $60 per barrel, a sentiment echoed in the futures market. Speculators, evaluating short-term price trends, have largely adopted a bearish outlook over the past month.

The resumption of oil flows through the Strait of Hormuz has instilled confidence among traders that supply shortages and disruptions are coming to an end.

No Deal Yet

However, most predictions regarding oil prices hinge on the assumption that the U.S.-Iran memorandum is a lasting peace agreement. In reality, it is merely a framework to negotiate a potential deal by the end of August.

There has been no public progress on this front, and the situation could worsen at any moment due to renewed tensions. Iran continues to assert claims of permanent control over the Strait of Hormuz, including demands for 'service fees' for safe passage through this crucial chokepoint.

While traffic through the Strait is slowly improving, shipowners and operators remain cautious about the conditions and terms for transit.

Maintaining low oil prices, especially leading up to the U.S. midterm elections, could motivate the U.S. Administration to pursue a deal.

Achieving such a deal will likely require difficult concessions. Furthermore, Iran's nuclear program remains unaddressed in the memorandum or in the sparse discussions held since the June agreement to negotiate.

Most market speculators expect traffic volumes through Hormuz to recover in the third quarter and oil prices to decline by year’s end.

Traders highlight how well the market managed one of the worst supply disruptions in history.

This resilience was due to several factors that significantly eased the impact.

Governments, including the U.S. Administration, released oil from strategic reserves, reducing inventories to levels not seen in decades.

China ceased purchasing crude on the spot market shortly after prices soared at the onset of the conflict, as they had reportedly accumulated over 1.3 billion barrels in both commercial and strategic reserves by February 28.

Additionally, the oil market was already facing a surplus before the war, with millions of barrels stored on tankers.

Inventories Deplete

The conflict and the suspension of flows through the Strait of Hormuz drained oil inventories globally, with the exception of China's considerable reserves, leaving no buffers outside China to absorb further disruptions. Rebuilding these stocks will require significant time and resources, contributing to future demand.

The anticipated global effort to replenish dwindling oil inventories will not counterbalance a significant surplus expected in the market next year, as traffic through the Strait of Hormuz appears to be normalizing, according to Goldman Sachs.

Citigroup forecasts that Brent Crude prices could fall to as low as $60 per barrel by year-end, predicting that flows through the Strait of Hormuz will soon stabilize and a U.S.-Iran deal could be reached in the coming months.

Nevertheless, analysts warn that existing oil inventories may not be sufficient to manage another major price spike.

The oil market remains highly vulnerable to the next disruption, given the current low levels of inventories, according to Energy Aspects' analysis at the end of June.

Moreover, the downturn in Chinese crude oil imports is expected to reverse at some point, as only part of the decline was attributed to structural changes. Meanwhile, U.S. crude inventories, including the Strategic Petroleum Reserve, have reached their lowest levels since 1985, leaving "no buffers left to absorb a demand return," according to Energy Aspects.

The depleted global inventory suggests operational viability without a buffer, but it indicates that future prices may be more susceptible to spikes, as noted by Ilia Bouchouev from the Oxford Institute for Energy Studies.

China Will Eventually Return to Buying

China's potential return to purchasing spot cargoes will significantly impact the market. Chinese oil imports fell for the fourth consecutive month in June, with seaborne crude arrivals dropping to just over 6 million barrels per day, the lowest since at least 2016, according to Vortexa data.

Eventually, these imports will rebound, although structural changes may prevent them from reaching pre-war levels, according to Pamela Munger, Head of Market Analysis for EMEA at Vortexa.

The restocking process for wider Asia is expected to be gradual rather than a rapid surge in purchasing, according to the analyst.

Until stockpiles are replenished, any fluctuations in U.S.-Iran tensions, negotiations, and sanctions could expose the oil market to further disruptions and subsequent price spikes.