Westpac has cut its Brent crude oil forecasts after shipping through the Strait of Hormuz recovered faster than expected. The bank now sees Brent averaging US$83 per barrel in the September quarter, down US$4 from its previous call, as the Middle East war premium unwinds.
Westpac lowered its Brent crude oil forecasts after shipping through the Strait of Hormuz recovered faster than expected following the US-Iran memorandum of understanding signed in June. Brent has since eased back to around $71.50 per barrel, surrendering most of the gains sparked by the Middle East conflict as markets price out the geopolitical risk premium.
The bank now expects Brent to average US$83 per barrel during the September quarter, down US$4 from its previous forecast, before averaging US$85 in the December quarter.
Gulf exports return to normal
The reopening of the Strait of Hormuz let vessels trapped inside the waterway leave quickly, while Saudi Arabian and UAE exports returned to normal without the production disruptions many had feared. Westpac notes that supply recovered "a touch faster than we expected", helping Brent unwind virtually all of the war premium that built up during the conflict.
Still, the backdrop looks fragile. Westpac describes the US-Iran memorandum as an uneasy truce, pointing to renewed flare-ups over the past week that briefly pushed Brent back towards US$80 per barrel.
Fundamentals expected to take over
Beyond the short-term swings, Westpac expects supply and demand fundamentals to regain control of the market. The bank highlights historically low OECD oil inventories, a likely rebuilding of government strategic reserves and recovering Chinese refinery demand as factors that should provide underlying support.
Prices are expected to stay below the conflict highs, yet Westpac believes volatility will continue as markets balance improving physical supply against the risk of further disruption in the Middle East.
Source: Exchange Rates UK
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