Oil extends decline on rising Middle East supply

Oil prices extended their decline on Thursday to near levels last seen before the start of the Iran war, as expectations of rising supply from the Middle East outweighed demand concerns. 

Brent crude futures for August delivery fell $1.06, or 1.44 percent, to $72.68 a barrel by 0639 GMT, while US West Texas Intermediate lost 76 cents, or 1.08 percent, to $69.58 a barrel.

Both contracts hit their lowest since February 27. August Brent was trading lower than September, which was priced at $73.59, signalling ample short-term supply. "The speed of this decline has caught plenty off guard as markets price in a much faster return of Middle Eastern barrels than most had anticipated just a fortnight ago," IG analyst Tony Sycamore said in a note. 

Brent had fallen more than $3 on Wednesday as supply concerns eased, and WTI settled down nearly $3. US Energy Secretary Chris Wright told a forum that flows through the Strait of Hormuz were close to those before the start of the Iran war, with at least 20 million barrels having exited the strait in the last 24 hours.

A return to complete normalcy would take a few weeks, however, because the strait needs to be demined, he added. Rising Middle Eastern supply, together with Iran set to boost sales after a temporary reprieve from US sanctions, drove down prices of physical crude oil cargoes around the world. An initial accord last week to end the US-Israeli war with Iran, which began on February 28, has allowed the resumption of traffic through the strait. 

The accord set up a 60-day period of negotiations to tackle tougher issues, such as Iran's nuclear programme. Wright said oil would continue to flow through the strait even if the deal did not hold, and that Iran would not be able to close it again. Oman opened temporary routes on Wednesday to ease tanker departures from the strait, with the International Maritime Organization and Omani authorities coordinating movements.

Qatar's prime minister visited Oman for talks on initiating negotiations over the strait's future management with Iran, Iraq and Gulf states. Macquarie analysts expected oil to normalise quickly toward pre-war levels as supply chains adapt and the Strait of Hormuz reopens. They forecast Brent and WTI prices to average $67 and $62 per barrel, respectively, in the third quarter, down from the second quarter's average of $94 and $87 per barrel. 

Last week US total crude stocks hit their lowest since 1984, the Energy Information Administration said on Wednesday, driven by strong refining demand and government oil releases from its emergency reserve. Markets, however, appeared unfazed by the EIA data as traders focused on the Strait of Hormuz.