Oil prices continue to fall as Trump sends negotiation signals; Macquarie warns oil market may return to oversupply before year-end

According to Zhihu Finance APP, as the US and Iran paused mutual attacks, oil prices fell sharply on Monday—the Brent crude futures price posted the largest drop in over three months, closing near $88 per barrel; WTI crude futures fell by more than 7%. Meanwhile, after former US President Trump stated that the US and Iran are holding talks to end the Middle East conflict, oil prices continued their downward trend on Tuesday. As of press time, Brent crude futures were trading at $85.29 per barrel; WTI crude futures at $81.88 per barrel.

On July 27, Trump said he had enough patience and time to reach an agreement with Iran, but if a new ceasefire could not be reached, the US would resume military strikes against Iran. It is currently unclear whether the two sides are engaged in any substantive negotiations. Trump stated: "We are engaged in very deep negotiations with Iran. If talks break down, we will return to very strong military action." When asked how much longer he was willing to give diplomatic efforts, Trump replied, "Not much longer. We either make quick progress or there will be a complete failure."

This month, the crude oil market has seen dramatic fluctuations. Initially, due to the renewed escalation of hostilities between the US and Iran and the spread of conflict to the Red Sea region, oil prices surged. However, as tensions have recently eased, oil prices have fallen back rapidly.

Nevertheless, traders remain cautious because tanker transport through the Strait of Hormuz has not yet returned to normal. Scott Shelton, an energy specialist at TP ICAP Group Plc, said, "I don’t think the Middle East issue is ‘resolved’." He added that the market needs to see "actual evidence of oil flowing through the Strait of Hormuz, and I don’t think we’ve seen that yet."

The Strait of Hormuz connects the Persian Gulf to global markets and, in times of peace, has carried about one-fifth of the world's daily oil supply. Negotiators from Iran and Oman are trying to reach an agreement to resume shipping through this vital waterway. According to people familiar with the matter, discussions are ongoing after officials from both countries met in Tehran last weekend. They noted that if an agreement is reached, Iran and the US would then be able to resume talks aimed at ending the war.

The Iranian military stated that, due to Trump’s decision to pause attacks, Iran has suspended retaliatory actions against US bases and personnel in the region. In the two weeks before the US paused strikes last Friday, Iran had almost daily attacks on targets in Kuwait, Bahrain, and Jordan in response to US actions.

In addition, supply disruptions in other regions have also eased. Kazakhstan’s main export port, which previously faced export interruptions due to a Ukrainian drone attack, has resumed loading operations. According to Kazakhstan’s Ministry of Energy, two oil tankers have begun loading crude oil at Caspian Pipeline Consortium facilities near Russia’s Novorossiysk port.

Given ongoing uncertainty in the Middle East, Macquarie analysts believe the crude oil market could return to a state of supply surplus by the end of this year, as the Trump administration faces growing pressure to end the Iran conflict with less than 100 days until the midterm elections.

Macquarie energy strategist Vikas Dwivedi noted that the downgrade of tensions "will happen within weeks, not months." He said, "They (the US government) are holding a put option, but as time goes on, that option is decaying, and the expiration date is the midterm election."

Dwivedi stated that although the likelihood of reaching a comprehensive peace deal in the short term is low, tensions are expected to ease, allowing Middle Eastern oil supply to recover. He added that once an agreement is reached, the market will see an "obvious" supply surplus.

Before the outbreak of conflict at the end of February, the crude oil market was preparing for a supply surplus, but the war took millions of barrels of oil off the market. Macquarie anticipates that global oil inventories will start to rebuild, with the daily surplus expected to reach 2 million barrels in the fourth quarter and double over the first three months of next year.

Trump hopes to reach an agreement to end this "deeply unpopular" war, while the Republican Party hopes to retain control of Congress in the November midterm elections. Currently, the average US gasoline price has once again exceeded $4 per gallon, and the broader issue of inflation is also one of voters’ top concerns.

For Iran, the risk lies in potentially facing stronger US military action after the midterm elections. During the now-defunct ceasefire agreement, Iran received some concessions from the US, but its economy is still suffering from the pressures of war.

Dwivedi stated that if tensions can be lowered before the US election, both sides may need to make concessions, including possibly imposing transit fees for the Strait of Hormuz. He believes this outcome is "inevitable." He said: "It’s obvious, there’s no way to stop Iran from blocking the Strait of Hormuz." On the other hand, Iran may still be unable to access tens of billions of dollars in frozen assets.