Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable Asset Management, shares his insights on oil prices.
Oil markets have moved from supply fears to tentative stabilisation. Although tanker traffic is gradually resuming through the Strait of Hormuz, exports remain well below pre-war levels and significant bottlenecks are likely to persist.
Meanwhile, efforts to re-build strategic and commercial reserves should support demand. As a result, oil prices are likely to settle around $75-80 a barrel, keeping headline inflation relatively elevated this year but posing only a limited challenge for central banks.
We expect oil prices to rise to $75-80/bbl
The oil forward curve has slipped into mild contango at the very front end: September futures now trade above the spot price for the first time since the war began, suggesting that the market is, at least marginally, oversupplied, pushing down on prices. The reason is straightforward. Tankers have resumed sailing through Hormuz, with a lot more oil floating at sea than usual.
What’s more, the UAE, no longer constrained by OPEC quotas, plans to double production, which could induce more production out of Riyadh too. While nearterm prices could fall modestly below today’s $70 per barrel, we expect oil to settle in the $75–$80 range over the coming 6-12 months.
60-65% of pre-war oil flows can keep the market balanced
Before the war, roughly 15m barrels a day (mb/d) of crude passed through the Strait of Hormuz – equivalent to about 15% of global oil demand – and rising to around 20mb/d when refined products are included. Not all of that crude needs to return to the waterway. More oil is now being exported via Saudi Arabia’s East-West pipeline and the UAE’s Fujairah route.
The UAE is also constructing a second pipeline, which, once completed, could allow it to export almost all of its current crude production without relying on Hormuz. Assuming, for now, that Iran can export 1.5mb/d, that Saudi Arabia ships 4.5mb/d via its pipeline network and the Red Sea, and the UAE 1.5 mb/d via Fujairah, only around 7.5mb/d of crude would need to transit the strait to restore pre-war export volumes from the region.
Refined products are different. Roughly 5mb/d of diesel, petrol and jet fuel still need to leave by sea. These back-of-the-envelope calculations suggest that traffic does not need to return to pre-war levels for exports to normalise. Flows between 60-65% of their former level would suffice, assuming demand remains broadly stable.
Traffic remains subdued
The Memorandum of Understanding signed on June 17 stipulates that the Strait should remain open and toll-free for at least 60 days. While ships have gone through, activity remains subdued. Total traffic, including both tankers and other commercial vessels, is running at roughly a quarter of its pre-war level, while inbound traffic is closer to a fifth.
The imbalance between outbound and inbound traffic is unsurprising. The immediate priority was to allow stranded vessels to leave the Gulf. Empty tankers, many of which have been redeployed elsewhere, will take time to return.
Traffic might struggle to recover
In addition, the situation remains fragile, and traffic could struggle to recover to the 60- 65% threshold. Ships are avoiding the main shipping lane, parts of which remain mined, and instead hugging the Omani coast, where waters are shallower and currents stronger. Tankers continue to rely on protection from the US Navy against intermittent drone attacks.
Moreover, no fully fledged, internationally recognised demining operation has yet been established. Once under way, clearing the main channel is likely to take months. All this suggests that the risk of disruption remains elevated. Insurance markets tell a similar story. Hull war-risk premiums have fallen from around 5% of a vessel’s value to roughly 2%, but that remains far above the 0.25% prevailing before the conflict.
China has been the main shock absorber
On the demand side, China has been the main shock absorber. During the war, it appears to have drawn down roughly 400m barrels from inventories – about as much as all advanced economies combined. Yet efforts to rebuild, and in some cases expand, strategic reserves are likely to support demand in the coming quarters, placing a floor under oil prices and, if anything, exerting upward pressure on them.
Unless the strait fully reopens – which we regard as unlikely – a supply shortfall relative to pre-war demand could persist. That remains true even if around 1mb/d of demand have been permanently destroyed through faster adoption of electric vehicles and other efficiency gains. Assuming a price elasticity of demand of -0.2, our estimates suggest that oil prices should settle close to $75-80 per y barrel later this year in order to balance the market.
Lower energy prices have eased pressure on banks to raise rates
What does this mean for central banks, particularly in Europe? Compared with pre-war forecasts, higher energy prices are likely to add around one percentage point to inflation. Some second-round effects are inevitable, but they should remain limited given the spare capacity that still exists across many European economies. Indeed, inflation in the UK has surprised on the downside in recent months. Financial markets initially responded to the conflict by pricing in a series of rate increases across Europe.
Those expectations have since been scaled back sharply, with implied rates moving close to our forecasts. Investors now anticipate only one additional 25-basis-point increase from the ECB, less than one full hike from the Bank of England by year-end, and no tightening from the Swiss National Bank. These seem appropriate. In the US, markets have begun to price a more hawkish Fed. Yet that shift reflects domestic developments far more than the outlook for oil prices.
