Brent crude flips to contango as Gulf oil floods market post-Iran war

Middle East oil producers are flooding the market with crude in the wake of the U.S.-Iran interim peace agreement, sending shipment volumes surging and pushing the Brent futures curve into contango for the first time this year.

Gulf Exports Rebound

Kuwait's crude production jumped to 1.65 million barrels per day in June from just 580,000 bpd in May, Reuters reported, with daily output reaching as high as 1.9 million bpd in the final ten days of the month. The OPEC member's pre-war production was roughly 2.5 million bpd. Meanwhile, OPEC's total output rose by 2.34 million barrels a day in June as Persian Gulf members restored exports through the Strait of Hormuz, according to a Bloomberg survey.reuters+3

Saudi Aramco has taken the unusual step of selling at least six million barrels on a spot basis aboard supertankers bound for South Korea, Japan, and China, a departure from its typical reliance on long-term contracts, Bloomberg reported. Reuters confirmed that at least five supertankers carrying around 10 million barrels of Saudi crude loaded from Ras Tanura have exited the Strait of Hormuz, with Aramco switching to spot pricing to accelerate sales as competition among suppliers intensifies. Saudi Arabia's exports have recovered to roughly 90 percent of pre-war levels.youtube+2

Market Structure Shifts to Contango

The supply surge is reshaping oil market dynamics. The six-month Brent spread flipped to a discount for the first time this year on Wednesday, dropping to minus 56 cents a barrel on Thursday before recovering to a small premium on Friday, according to Reuters. The front-month September Brent futures contract traded below each of the next five contract months, a price structure known as contango that signals investors see ample near-term supplies.reuters+1

The shift is stark given the extreme backwardation that prevailed during the conflict, when near-term Brent contracts traded as much as $40 above deferred months. The interim peace agreement signed in June between the U.S. and Iran reopened the Strait of Hormuz, unlocking stockpiled barrels that Gulf producers had been unable to export during the roughly four-month conflict that began on February 28.bloomberg+2

Recovery Challenges Remain

The rapid return of barrels comes at a time of weakened Asian demand. Saudi Arabia had already slashed its July official selling price for Arab Light crude to Asia by $6 a barrel to a $9.50 premium over regional benchmarks. TotalEnergies ↗ 1.64% CEO Patrick Pouyanné warned earlier this year that the closure of the Strait had affected roughly 20 percent of global crude, refined product, and LNG exports, and that even after a resolution, oil would take 25 days to reach key Asian customers.boereport+2

Whether Gulf producers can sustain the pace of recovery remains uncertain. Brent crude had dropped below $74 per barrel by late June, a fraction of the levels above $100 that prevailed during the conflict's peak. The contango structure suggests the market now faces a near-term glut rather than the scarcity that defined the first months of the war.federalnewsnetwork