Rising Expectations of a Global Oil Surplus Push Crude Prices Back to Pre-Conflict Levels

[Chart 1: OPEC Illustration]

As energy shipments through the Strait of Hormuz continue to normalize and OPEC+ signals further production increases, international crude oil prices opened lower, intensifying market concerns over a potential global supply surplus.

On Monday, Brent crude fell below $72 per barrel, while West Texas Intermediate (WTI) slipped to around $68 per barrel, fully erasing recent gains and returning to trading levels last seen before the geopolitical conflict erupted on February 28.

During a virtual meeting on Sunday, seven key OPEC+ members led by Saudi Arabia and Russia agreed to raise their collective production quota by an additional 188,000 barrels per day (bpd) starting in August. The move represents another step in the gradual unwinding of the production cuts implemented under the 2023 agreement.

OPEC+ also emphasized that member countries retain the flexibility to increase, pause, or reverse the phased rollback of production cuts when necessary. Meanwhile, nations that exceeded their output quotas remain obligated to fully compensate for overproduction.

According to OPEC data cited by Reuters, OPEC+ production plunged from 42.77 million bpd in February to 33.13 million bpd in May as conflict-related disruptions severely impacted exports. Although core members increased production quotas by nearly 800,000 bpd between April and July, transportation bottlenecks meant that much of the additional supply remained largely theoretical rather than reaching global markets.

As the United States assisted several countries in restoring export capacity, production has gradually begun to recover, although output remains below pre-conflict levels. UBS analyst Giovanni Staunovo noted that investors are closely monitoring actual tanker traffic through the Strait of Hormuz and the pace of global oil demand recovery.

Following the continued effectiveness of a temporary U.S.-Iran understanding aimed at maintaining regional stability, shipping activity through the Strait of Hormuz has rebounded rapidly. Major Gulf producers have accelerated output increases, with Saudi Arabian exports approaching pre-conflict levels and tankers once again transiting the strait without major disruptions. The United Arab Emirates has also resumed crude exports.

In addition, the coordinated release of strategic petroleum reserves by the International Energy Agency (IEA) has further eased supply pressures. As a result, Brent crude prices recorded a cumulative decline of nearly 30% during the second quarter of this year.

Citigroup has warned that international crude prices could potentially retreat to $60 per barrel by year-end. Following the funeral held in Tehran for Irans Supreme Leader, expectations for a gradual normalization of regional geopolitical conditions have strengthened further.

Improving supply conditions are already becoming evident in physical markets. The Brent-Dubai crude spread has shifted into a contango structure, typically viewed as a bearish signal indicating expectations of ample future supply. In spot markets, many crude grades are trading below their implied benchmark values.

Meanwhile, OPEC+ faces growing internal challenges. The United Arab Emirates has exited the alliance, while Iraq continues to push for a larger production quota. At present, only seven core producers remain actively involved in the group's monthly production management framework.

The combined impact of the reopening of the Strait of Hormuz and OPEC+'s production increases is pushing the global oil market from concerns over supply shortages toward the possibility of oversupply. In the near term, lower oil prices could help ease global inflationary pressures and reduce energy costs. However, low inventory levels and uncertainty surrounding the pace of demand recovery continue to pose risks.

Over the medium to long term, crude prices are unlikely to establish a new equilibrium until shipping through the Strait of Hormuz returns to stable and uninterrupted operations and OPEC+ maintains effective internal coordination. For now, expanding supply and ongoing geopolitical uncertainty remain key forces shaping the market. Investors should closely monitor the August OPEC+ meeting and any changes in actual shipping volumes through the strait.

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