The black stuff is gushing back to earth. Oil prices have collapsed to levels not seen since before the Iranian escalation, as the market’s collective panic over supply disruptions gives way to cold, hard reality. Brent crude, the global benchmark, slumped below $65 a barrel this morning, a drop of more than 20% from the spike highs recorded just weeks ago. The trigger? A combination of factors that, frankly, the bulls should have seen coming.
Let’s start with the headlines. The diplomatic back-channel between Washington and Tehran has produced what can only be described as a tepid truce. No formal agreement, but enough de-escalation to convince the trading floors that a full-blown blockade of the Strait of Hormuz is off the table. That alone was the single biggest risk premium baked into the price. Now it’s being unwound with brutal efficiency.
But the real story is supply. OPEC+ has been cheating like a schoolboy on a maths test. Production quotas were already porous, but with Iran’s actual exports barely dented by sanctions and Russian barrels flooding the market despite a promised cut, the cartel’s discipline is a joke. The International Energy Agency’s latest monthly report, released under the radar last Thursday, revealed that global inventories are building at a pace that would make a hoarder blush. Storage tanks in Cushing, Oklahoma, are filling up faster than a pub on quiz night.
Then there’s the demand side. The Chinese economic rebound has been a damp squib. Manufacturing PMIs are back in contraction territory, and the property sector is still a smouldering wreck. Meanwhile, Europe is flirting with a recession that nobody wants to acknowledge, and the US shale industry, having been given a new lease on life by higher prices, is now pumping at record levels. The Permian Basin is a gusher of crude that shows no signs of slowing.
Investors are voting with their feet. Money is pouring out of commodity ETFs and into safe havens. The dollar index is climbing, which puts additional downward pressure on dollar-denominated oil. It’s a textbook rout. The speculative long positions that were built up during the panic are being liquidated with extreme prejudice. I’ve seen this movie before. It ends with a few investment banks taking a bath and a lot of retail traders wondering what hit them.
Now, the question is whether this is the new normal. The geopolitical risk premium can always return. One drone strike on a Saudi facility and we’re back to $80. But for now, the market is pricing in a world where supply is ample and demand is anaemic. Central banks, bless them, are still hiking in some corners, which only reinforces the deflationary mood.
For the average motorist at the pumps in the UK, this is cold comfort. The petrol price lag means it will be weeks before they see a few pence off a litre. But for the broader economy, lower oil is a tax cut. It eases inflationary pressures and gives the Bank of England a tiny bit more wiggle room. Don’t expect them to pivot, though. They are still scarred by the inflation dragon they let loose.
In short, the oil market has had a collective reality check. The war premium has been stripped away, and what is left is a stark picture of oversupply. The smart money, such as it is, is probably shorting energy stocks and waiting for the next panic. Because in this game, the only certainty is volatility.
Alastair Thorne, Chief Financial Editor.
