Crude prices retreated to three-month lows as traders shifted their focus from geopolitical risks in the Middle East to the prospect of rising global supply, EBW Analytics strategists said in a note Monday, noting that the market could swing from acute tightness to oversupply.
WTI for July delivery fell as low as $73.58 per barrel on Friday after the US and Iran signed a memorandum of understanding that raised expectations of the Strait of Hormuz reopening.
EBW analysts said that, although Iran reiterated threats to close the Strait of Hormuz over the weekend, over 17 million barrels per day transited the strategic waterway on Saturday.
The consultancy said the market is increasingly pricing in a scenario in which supply growth overwhelms demand, particularly if diplomatic progress between the US and Iran continues.
Brent crude for August delivery is expected to trade between $75.50/bbl and $83.50/bbl over the next seven to 10 days, with a target price of $77.50/bbl.
EBW said that prices could moderate to a range of $67.50/bbl to $79.50/bbl by September, while November contracts are projected to drift lower toward a target of $73.50/bbl.
The forward-looking market is expecting "a gusher of supply," EBW said, pointing to International Energy Agency projections that global oil production could rise by 8 million barrels per day by 2027, compared with demand growth of 2 million b/d.
Though tanker traffic via the Strait remains about 15% below pre-conflict levels, alternative supply routes and weakening Asian demand are helping loosen balances.
Saudi Arabia's East-West pipeline, lower Chinese imports and strategic petroleum reserve releases are adding to available barrels, creating the potential for inventories to rebuild later this summer.
However, physical markets remain tight in the near term. US crude inventories fell by 8.3 million barrels in the latest Energy Information Administration report, while the IEA estimated that global stocks declined by 143 million barrels in May, equivalent to 4.6 million b/d.
Meanwhile, natural gas markets are following a different trajectory.
US gas prices rebounded after the July contract briefly dropped to $3.017 per million British thermal units last week, supported by strong liquefied natural gas feedgas demand, a bullish storage report and expectations of warmer weather in early July.
July natural gas settled Friday at $3.233/MMBtu, up 3.6% from the previous week. EBW forecasts prices to average about $3.24/MMBtu over the next seven to 10 days, with the market likely to test higher before easing.
August contracts are expected to average $3.12/MMBtu, while September prices could retreat to around $2.86/MMBtu.
EBW analysts said production has climbed to a two-month high, however, suggesting the recent rally may prove temporary.
Storage levels remain 140 billion cubic feet above the five-year average despite a deficit over the year of 61 billion cubic feet, pointing to weak fundamentals heading into the autumn.
Beyond hydrocarbons, EBW analysts said the changes in US electricity regulation are reshaping power markets.
Analysts said a Federal Energy Regulatory Commission order aimed at facilitating large-load interconnections is projected to accelerate behind-the-meter generation and transmission investments for data centers and other energy-intensive industries.