Oil falls below $75 for the first time since March as Hormuz traffic begins to recover
Key keywords: Brent crude price, Strait of Hormuz traffic recovery, oil price drop below $75, March 2024 oil price benchmark, Middle East maritime security, OPEC+ supply policy, global oil demand outlook, US crude inventory data
International benchmark Brent crude fell 3.2% to $74.83 per barrel in intraday trading on Tuesday, marking the first time it has dropped below the $75 threshold since late March, driven primarily by the rapid recovery of shipping traffic through the Strait of Hormuz, the world’s most critical oil transit chokepoint.
The Strait of Hormuz, which carries roughly 20% of all globally traded seaborne oil, had seen 60% of scheduled oil tanker traffic suspended over the past three weeks, after Iran threatened to close the waterway in response to Israeli airstrikes on its military facilities. Major shipping lines including Maersk Tankers and Mediterranean Shipping Company had rerouted vessels around the Cape of Good Hope, adding 12 to 15 days of transit time and $280,000 in extra costs per voyage, which pushed up supply risk premiums and kept Brent prices hovering above $81 per barrel through most of May.
Latest data from the International Maritime Organization shows that as of Monday, daily tanker traffic through the strait has recovered to 94% of pre-conflict levels, after Iran publicly stated it would not escalate military tensions with Israel, and a joint maritime security task force comprising the US, UAE, and Oman confirmed that navigation safety in the area has returned to normal.
Additional downside pressure on oil prices came from newly released macroeconomic and supply data: the US Energy Information Administration reported last week that domestic crude inventories rose by 2.8 million barrels, far exceeding market expectations of a 1.2 million barrel build, while China’s May manufacturing PMI came in at 50.2, slightly below analyst forecasts and signaling softer than expected industrial energy demand. OPEC+’s latest monthly output report also showed that the group’s collective production cut compliance rate fell to 89% in April, down from 94% in March, as several African and Middle Eastern producers increased output to ease domestic fiscal pressures.
Market analysts note that if the Strait of Hormuz remains open and no new geopolitical shocks emerge, Brent prices could test the $72 support level in the coming two weeks, though the upcoming June 2 OPEC+ policy meeting, where members will discuss whether to extend existing voluntary production cuts, will be the next major catalyst for price movements.
Featured Comments
As a commodities analyst with 12 years of experience covering the energy market, this drop is almost entirely driven by the unwind of the geopolitical risk premium that had been baked into oil prices since the Iran-Israel tensions flared up. That premium was estimated at $8 to $10 per barrel, and now that Hormuz traffic is back to normal, that has almost completely evaporated. The next big move will depend entirely on whether OPEC+ decides to extend their production cuts into the second half of the year, and if US summer driving season demand comes in stronger than expected.
My company operates 17 oil tankers that regularly pass through the Strait of Hormuz, and we resumed normal transit routes 5 days ago. Rerouting around the Cape of Good Hope was costing us an extra $300,000 per voyage and delaying deliveries by two weeks, so the return of normal traffic is a huge relief not just for shipping firms, but for downstream refiners and consumers who were facing higher fuel costs from the extra transit expenses. I expect retail gasoline prices in most markets will start to fall in the next 10 days as these cost savings get passed down the supply chain.
I got burned going long on oil earlier this month when I bet the Iran-Israel conflict would escalate and send prices above $90. It’s a good reminder that geopolitical trades are extremely risky, especially when both sides have clear incentives to avoid a full blown war. I’m going to stay on the sidelines for now, and might consider buying back in if prices drop to $72 and OPEC+ announces they’re extending their cuts through the end of 2024.
This price drop is good news for emerging economies that rely heavily on oil imports, especially countries in South Asia and Africa that have been struggling with high inflation and energy costs over the past two years. If oil stays below $78 for the rest of the quarter, we could see a 0.3 to 0.5 percentage point boost to GDP growth for many of these import-dependent nations this year.