The closure of the Strait of Hormuz is a temporary supply shock, and once it reopens, oil prices should drop quickly, says Fitch Ratings.
In a research note, the rating agency said that the recent spike in oil prices is largely just the result of the disruption of shipping through the Strait — which represents a logistical supply shock, but not a long-lasting loss of oil production.
And, when normal shipping conditions return, the oil market will likely soon return to oversupply, driving prices lower, it said.
“We assume the Strait will reopen around the end of July and expect [crude oil prices] to fall sharply from the high March-July levels,” it said.
Specifically, Fitch projects that the oil market will return to oversupply by September — given the lack of significant damage to the regional oil infrastructure, coupled with an expected, “rapid recovery in Middle East production, strong non-OPEC supply growth and potential OPEC output increases beyond pre-conflict quotas.”
The rapid recovery in supply, “will create an overhang in the market and push oil prices down,” Fitch said.
The rating agency’s current assumption for oil prices — it expects the price of Brent crude to average US$87 per barrel for the year — reflects its expectation that the Strait will reopen in July, but uncertainty about the timing of that step, “remains high,” it said.