Brent crude oil, the international benchmark, dropped after OPEC Plus announced it would modestly increase production. Oil prices were trading around pre-Iran war levels as Saudi Arabia cut its official selling prices, OPEC+ approved a production increase of 188,000 barrels per day starting in August, on top of similar increases for June and July, and exports through the Strait of Hormuz had recovered further. But on July 7, Iran targeted three ships in the Strait of Hormuz, which reignited strikes on both sides. In late April, Brent oil futures hit a four-year high above $126 per barrel, and despite declining to $72 a barrel with the OPEC+ announcement, they rose to $78 a barrel on July 8. President Trump said the ceasefire was essentially over due to Iran targeting 85 U.S. military sites in Bahrain and Kuwait.
OPEC+ Quotas
The OPEC+ announced increase in oil production was the fifth consecutive month it agreed to raise oil outputs, but it is likely a paper transaction if the Strait of Hormuz remains essentially closed. The cartel has added 940,000 barrels a day to quotas since the war began. Seven countries are participating in increasing production: Saudi Arabia, Russia, Iraq, Kuwait, Kazakhstan, Algeria, and Oman. The United Arab Emirates (UAE) produced oil near record highs of 3.8 million barrels per day in June after leaving OPEC and its quotas. Many Middle East oil producers cut production because their oil had no buyers during the conflict with Iran and the ensuing turmoil in the Strait of Hormuz.
Iran Oil Sales
Iran was allowed to sell its oil during the ceasefire as the United States had removed sanctions. However, it was finding it challenging to attract customers, particularly since China, its largest customer, is seeking alternatives. China’s oil imports have dropped since the war in Iran started in late February, depressing oil demand. In May, its oil imports dropped 29% from a year earlier to 7.82 million barrels per day, the lowest level since February 2018. China’s oil imports from Iran more than halved in June to about 654,000 barrels per day, down from the prior month, according to Bloomberg. China had stocked up on lower-priced oil from Venezuela, Iran, and Russia—countries whose oil was under sanctions. It built its stocks to over a billion barrels to be ready for any conflict in the Middle East. And it has been encouraging its people to buy electric vehicles rather than gasoline cars, thanks to its cheap coal-fired generators that supply over half of its electricity, supplemented by hydroelectric, wind, solar, and nuclear power.
Iran has shipped more than 40 million barrels of oil since the United States lifted its naval blockade with the ceasefire agreement. With the return to fire, the United States revoked the waiver that allowed Iran to sell its oil on the global market for 60 days, a key element of the interim deal both sides signed last month. The U.S. Treasury Department issued a general license allowing Iran to produce, sell, and deliver oil on the global market for two months during the ceasefire. The license was designed to give Iran greater access to U.S. dollars by allowing it to conduct oil transactions in U.S. dollars. It also allowed American importers to buy Iranian crude oil, petrochemical products, and petroleum products. Iran has threatened to impose tiered fees on vessels transiting the strait, either for safe passage or for services provided as ships pass through.
Stock Drawdown
During the initial weeks of the Iran conflict, the International Energy Agency coordinated the release of 400 million barrels of oil from emergency reserves to contain prices and ensure supplies. The U.S. Strategic Petroleum Reserve stockpiles dropped from 415 million barrels at the end of February to 326 million as of June 26–the lowest level since 1983. U.S. oil production rose to 13.93 million barrels per day in April, the highest on record.
Conclusion
Oil prices were around pre-Iran war levels as OPEC+ approved an 188,000-barrel-per-day production increase starting in August, and oil flows were moving through the Strait of Hormuz. The cartel has added 940,000 barrels a day to quotas since the war began, and the United Arab Emirates is producing near record highs, having left OPEC and its quota. Like Saudi Arabia, the UAE has a pipeline that avoids the strait. Oil prices, however, jumped due to Iran attacking three ships in the strait and both sides resuming strikes.
China reduced its oil imports during the Iran conflict, and its oil imports from Iran more than halved in June compared with the prior month, which could become challenging for Iran to dispose of its oil as China is its biggest customer. Iran may be looking to supplement its oil revenues by imposing transit fees through the Strait of Hormuz, particularly after the United States revoked its waiver allowing it to sell oil on the global market following the recent strikes.
