Oil slides to $73 as Hormuz reopening unleashes supply glut

Global oil prices have tumbled more than 25 percent over the past month, retracing nearly all of the gains recorded since the US launched airstrikes on Iranian targets in late February, as the reopening of the Strait of Hormuz unleashes a backlog of cargoes that threatens a near-term supply glut.

Brent crude futures for September delivery, the global benchmark, fell 4 percent to $73.76 a barrel Wednesday, just 1.2 percent above the closing price on Feb. 27, the day before the US began its military campaign. West Texas Intermediate crude briefly traded below $70 for the first time since the strikes and has fallen more than 27 percent since early June.

"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," said Ole Hansen, head of commodity strategy at Saxo Bank. "Markets are effectively pricing the reopening of the supply pipeline rather than the underlying depletion of inventories."

The war removed 1.3 million barrels a day of production from the Gulf region and effectively closed the Strait of Hormuz for much of the second quarter, the biggest supply disruption in history. International Energy Agency data shows massive drawdowns in inventories globally, with the US Strategic Petroleum Reserve falling to its lowest level since 1983 last week. Yet the focus has shifted to a growing queue of cargoes waiting to move as shipping traffic improves following a preliminary US-Iran agreement this month.

The collapse in crude has pushed US gasoline prices down 13 percent from their war peak to a national average of $3.93 a gallon, according to the AAA motor club, while diesel slipped to $4.98. Both remain more than 30 percent above pre-war levels.

Stocks Decouple From Oil's Slide

The S&P 500 has fallen 1.4 percent over the past month despite the sharp decline in crude, while the Nasdaq Composite is down about 3 percent — a striking divergence from the correlation that dominated markets during the first months of the conflict. The Dow Jones Industrial Average, by contrast, has gained 3.3 percent, suggesting rotation out of tech-heavy indexes into sectors tied to the broader economy.

"The key uncertainty remains how quickly oil flows through the Strait of Hormuz can normalize, which obviously depends on how quickly upstream oil production in the Persian Gulf can return," said Warren Patterson, head of commodities strategy at ING. "While the consensus is that this normalization will take months rather than weeks, price action in the oil market suggests a more rapid recovery."

The decoupling reflects a shift in market drivers. Questions over the fate of the artificial intelligence investment wave, the rapid advance in chip stocks, and a suddenly hawkish Federal Reserve under new Chairman Kevin Warsh have pulled stocks away from their oil-price correlation and will likely separate their performance over the second half of the year.

Bond Yields Retreat as Inflation Fears Ease

Oil's decline has removed some of the inflation-powered rise in US Treasury bond yields. The 10-year note yielded 4.41 percent Wednesday, about a quarter-point below its late-May peak of 4.57 percent, while 30-year paper that briefly topped 5 percent has also retreated. Rate-sensitive two-year yields fell to 4.14 percent.

"Negotiations were always going to be fractious, and no doubt there will be more volatility before things are brought to a close," said Thomas Matthews, head of markets for the Asia Pacific region at Capital Economics. "But as long as re-escalation is ultimately avoided, our sense is that domestic macro drivers — rather than oil's daily fluctuations — will reassert themselves as the key influence on markets."

The last time Brent crude fell more than 20 percent in a month was during the initial Covid-19 demand collapse in April 2020, when prices briefly turned negative. That episode preceded a sustained rally driven by OPEC+ production cuts. This time, the supply surge is coming from the release of trapped cargoes rather than new production, raising questions about how quickly the market can absorb the overhang.

The normalization of Gulf supply could further depress energy stocks and commodity-linked currencies while benefiting consumer-facing sectors and airlines. But with the Fed's next policy decision due in late July and second-quarter earnings season beginning with JPMorgan's update on July 14, the macro calendar — not the daily oil fix — is likely to drive markets into the summer.

This article is for informational purposes only and does not constitute investment advice.