The SoH doesn’t look like it will open any time soon sending Brent crude sharply higher. The Brent crude M1 contract has rebounded sharply since the middle of last week (+10%) following earlier sharp declines on hopes on an imminent deal between Iran  and Oman on how to operate the SoH in the future. Negotiations which Donald Trump and the US supposedly was a part of. It is now blistering clear that the US wasn’t part of these negotiations. Iran has made i very clear that an agreement with Oman does not lead to a reopening of the Strait before the US complies with the MoU agreement between Iran and the US from earlier this summer (unfreezing Iranian assets, lifting of all sanctions, lifting of the current US embargo on Iran, acknowledging that Iran has the full control of the SoH, peace in Lebanon, Gaza and Yemen,..). Trump cannot agree to the MoU he signed onto without getting massive political criticism at home in the runup to the midterm elections. So that won’t happen. It has also become clear that the US is running low on ammunition. Trump doesn’t have the option any more to threaten Iran with further attacks as it doesn’t have the necessary defensive ammunition (Patriot rockets) to defend its military bases and allies in the Middle East region against retaliatory attacks from Iran. As a result he is now trying to fade the whole situation instead stating that economic sanctions will have to do the job instead (Iran is broke,…., etc). But that is a tedious and a very gradual process. It all means that there is little chance for a reopening of the SoH for normal shipping flows any time soon. And that is why Brent crude has spiked back up.

Commercial oil stocks in China has fallen as a result of much lower imports. The latter implies an emptying of oil stocks in China. Kepler has been tracking Chinese crude oil stocks and estimates that they are down by 83 mb from April to July. That is very little given that Chinese net crude and product imports was down an average 3.7 mb/d from April to July (= 452 mb) versus the average in 2025. There has thus probably been declines in Chinese strategic reserves as well. Though these are not published.

Chinese net imports of crude and products was down sharply in April to July. June saw the sharpest drop.

Factors which prevented exponential crude oil prices have started to fade. Several of the factors which softened the blow from the closure of the SoH regarding crude oil may now start to fade. The emptying of OECD SPR is starting to slow. China has started to import more and a news story on Bloomberg today highlights that China Teapot refineries may start to buy more Iranian crude floating around waiting for a buyer in Asia. How much crude is really escaping out through the SoH is hard to pinpoint exactly. Shifting it from 1 VLCC per day to 3 VLCCs sneaking out lifts exports from 2 mb/d to 6 mb/d which makes a whole lot of difference.

Normal exports of crude out of the SoH was about 14 mb/d before the closure. How did the world cope?

But neither China nor the US wants an exponential rally in crude oil and they have tools to prevent it. Two strong forces will however likely counter an exponential crude oil price rally. 1) China does not want an oil price rally to $150/b or higher to kill the global economy as it would badly hurt its $1.3trn surplus export industry while its domestic economy is weak. Rather import less and draw down inventories further. 2) Trump doesn’t want an exponential crude oil price in the runup to the US midterm elections. Rather put more SPR crude oil into the market to dampen it.

Oil products (and natural gas) is where the pain and trouble is. Winter could be expensive for consumers. Oil products is however a different matter. Lost exports of oil products from the SoH has not been replaced and Russian refineries are being hit every week with refining throughput there probably down by 1.5 mb/d. The Houthis in Yemen are also attacking Saudi refineries. All this helps to reduce crude oil demand by refineries while it keeps supply of oil products ultra-tight. The world is starved for diesel and jet fuel products and there is not much the US and China can do about it. Whole sale diesel prices at around $160/b is also showing that demand destruction is not all that big on the end-consumer side of the equation. The world keeps consuming oil products and demand is not dented all that much. The very high diesel prices is partly a reflection of that.

Brent crude, ARA oil products and nat gas in the Netherlands in USD/boe. Front-contracts

Brent M1 moving below the 200 dma of $78.7/b. Brent crude continued its move lower yesterday with a decline of 3.3% to $77.9/b. This morning it is adding another drop of 1.4% to $76.8/b. Israel bombing Lebanon during the weekend was a violence of the MoU and Iran was quick to declare the SoH closed again. But the willingness to move forward by both the US and Iran obviously trumped the bombing in Lebanon making the event more of a hiccup on the road of further negotiations.

The US has now waived sanctions against Iranian oil exports for two months allowing Iran to sell its oil all over the world, though sanctions instated in Europe will take more time to unwind. Oil from Iran, Russia as well as Venezuela can for the time being be sold across the world without any sharp discount due to sanctions. Chinese Tea-pot refineries will suffer as they previously could buy rebated crude while selling products at market prices.

Crude oil is no flowing out of the SoH with latest number close to 7 mb/d on a three day moving average. That is still well below the 14 mb/d of crude and 6 mb/d of products normally flowing out of the SoH. Latest estimate is that there is around 80 mb of crude on water inside the Persian Gulf and maybe another 80 mb of oil products on water as well. If crude is exiting the SoH at a rate of around 7 mb/d, then the 80 mb of crude would be depleted within 10-15 days and there after the flow would rely on new crude tankers entering, loading and then exiting the SoH to continue further flows. Given the uncertainties surrounding the status of the SoH with Iran stating that it was closed again as recent as this weekend, there is likely an asymmetry here where ships and oil stranded in the SoH for months are much more eager to exit than new ships are eager to enter.

For now Brent crude keeps falling like a rock with the front-end Brent contract now only trading at a premium of $7.6/b above the five year contract. Quickly heading towards parity. The Brent M1 contract has now broken below its 200 dma of $78.7/b and is closing in on the Fibo-level at $74.7/b. Below that there is not much more supporting levels to be found before $73/b which would close the gap from February 3.

Brent crude M1 technical levels

Net long speculative positions are also falling like a rock and as of Tuesday last week the net long positioning in Brent and WTI together summed to 314 million barrels and falling fast.

Will there be a rebound? A possible combination could be an exhaustion of the oil blob caught within the SoH within 1-2 weeks if exits continue at current rate while new ships entering are much more cautious, more Israeli bombardments in Lebanon as Netanyahu fights for re-election, a temporary closure of the SoH again while speculative short positions take cover buying back and covering their positions.

US and Israeli stands versus Iran could harden beyond elections so 2027 surplus is far from given. But Iran and the US are all in all moving towards a set of solutions with both clearly eager to reopen the SoH and keep it open. And that is what the market is pricing along with sharply falling prices. The ongoing discussions will likely take months and last beyond both the upcoming Israeli election (before 27 oct) and the US midterm elections on 3 Nov. Beyond those dates the stance by both Israel and the US may harden again versus Iran. But Iran knows that and is most likely preparing for such a hardening turn. Thus a surplus of oil and global oil stock rebuilding in 2027 (as now is mostly projected) is far from given.

Selling down on a ”deal”. Brent crude fell 6.2% last week with accelerated weakness towards the end of the week. Close of the week at $87.33/b and low of the week (and on Friday) of $85.8/b. Brent is falling another 4% this morning to $83.7/b on confirmation by Iran that a MoU text has been reached and that it will be signed on Friday this week.

So what is this ”deal” worth? Talk on the desk here this morning is that it is much like ”putting lipstick on a pig” where Trump has to sell this at home as a victory where ”the SoH has reopened”, the nuclear issue will be ironed out over the coming 60 days (or maybe 600 days?) and US consumers are getting a lower gasoline price and maybe US republicans survives the midterm elections.

The importance for Iran is that it emerges as the defacto winner of this war in the eyes of the non-US public world. That Iran now onwards is the ”ruler of the SoH” (combo of geography and new weapons systems like drones) or more softer: ”the guarantor of safe passage through the SoH”.

Iran doesn’t need nuclear weapons any more. Nuclear deterrence doesn’t work any more. Ukraine has made many attacks deep into Russia without being nuked in return. Plenty of Iranian ballistic rockets blasts over Israel but Iran wasn’t nuked in return.

There is no trust between the US and Iran. We don’t know all the details yet of the MoU. But what we do know is that there is no trust between the US and Iran what so ever. This is probably more like a descriptive text on how they can cooperate in a way where both sides keeps tactical leverage. Neither side makes irreversible concessions. Violations can be punished quickly. Cooperation produces immediate benefits.

This is a fragile structure. It can easily break down. There may be details which cannot be overcome. To be seen on Friday. The US has to show that it is willing put enough force behind managing and restraining Israel versus Hezbollah in Lebanon. We have seen that Netanyahu hasn’t listened all that much to Trump’s directives and wishes. This could be a major obstacle.

A gradual reopening is tactically preferable for Iran. A tactical leverage for Iran right now is that global oil stocks have been drawn down towards painful and increasingly dangerous levels with increasing risks for oil price spikes in mid-July to August. This together with US midterm elections on 3 November gives tactical leverage to Iran. Iran probably doesn’t want to fully give up on that leverage. A rapid, full reopening where global stocks are able to refill over the coming 60 days will significantly erode that leverage. If Iran reinstates a closure of the SoH after 60 days (if talks break down again), then the effect won’t be that impactful in terms of prices and the US midterm elections.

So a gradual and partial reopening where global markets gets the oil they need while they are unable to rebuild stocks could be a practical middle way for both parties. Trump can sell it as ”the SoH has reopened” and get affordable gasoline for US consumers. Iran can sell it as ”the SoH has fully reopened, but there is some friction” so flow is only 60-80% of normal. 

Not much real demand destruction below $100/b. What we do know is that there is not much real price pain demand destruction for oil globally at an oil price below $100/b. A lot of demand-shock destruction. Fear. But demand should now come roaring back towards normal with fear for exceptionally high prices now is rapidly receding.

Sudden China demand destruction due to EVs? Bullocks. EV share of total Chinese carpool now around 13%. Share of new sales of EVs has reached 50%. This is a very gradual process. It doesn’t make oil demand fall like a rock over night. When EV new sales share reaches 100%, then the gasoline car pool will contract by some 5-10% per year. But that is only gasoline. Sudden reduction in Chinese oil demand is more about shock and risk.

Chinese crude oil imports will come roaring back. At what price? Today’s ”neutral” oil price is $70/b. That is the five year price which has steadily traded around the $70/b mark over the past 3-4 years. With still a risky picture one would think that China and the rest of the world will be big buyers of oil in the range of $70-85/b.

Global demand will likely snap back towards normal, forecasted demand and growth at such prices.

Physical reopening is a gradual process. The physical and practical reopening of the SoH will likely be gradual rather than sudden. And that probably suites Iran tactically as well.

Brent M1 price versus the Brent 5-yr (today’s ”normal” price)