Has the market overreacted to the oil price falling back to "pre-Iraq war levels"?

Brent crude oil fell below $77 per barrel this week, almost wiping out all geopolitical premiums since the outbreak of the Iran war, hitting the lowest level since the start of the conflict. However, several analysts warn that the futures market is pricing in a supply recovery that has not yet truly occurred, and a significant deviation is emerging between the optimistic sentiment in the financial markets and the reality of the physical oil market. On Wednesday night, the US and Iran signed a 14-point framework memorandum of understanding, with the US Central Command confirming the lifting of the blockade on the Strait of Hormuz, and reports of oil tankers passing through the waterway. Brent crude oil fell to $76.54 per barrel during the day before closing slightly up at $79.85; WTI fell 0.2% to $75.85, hitting the lowest level since the start of the conflict. The average retail oil price in the US fell below $4 per gallon to $3.999, but still about $1 higher than before the conflict. Since peaking at over $100 per barrel in May, Brent has fallen by over 25%, as the market quickly bets on a large amount of Middle Eastern oil returning to the global market. However, from the absence of shipping insurance and oil tanker freight rates still three times higher than before the war, to the International Energy Agency's estimation of global inventories continuing to decline by nearly 4 million barrels per day, the fundamental reality is much more complex than market pricing. The race between the financial market and the physical market is becoming the core divergence in the current oil price trend. Many institutional analysts believe that there is a risk of an oversold in this round of decline, but there are also opinions pointing out that the expected relaxation of Iranian sanctions has not been fully priced in, and if confirmed, oil prices still face further downward pressure. Hormuz reopening leads to a downward trend driven by sentiment The direct trigger for the sharp drop in oil prices this time was the signing of the US-Iran memorandum of understanding. Under the agreement, Tehran will reopen the Strait of Hormuz - a waterway that normally carries about one-fifth of the world's daily oil trade flow - in exchange, Washington will lift the blockade on Iranian ports and its oil sales sanctions, opening a 60-day window for nuclear agreement negotiations. Iran also promised never to develop or acquire nuclear weapons. The market's reaction was immediate: sell first, ask questions later. Trump declared on TruthSocial, "Oil is flowing...the stock market is roaring...you're welcome!" Goldman Sachs analyst Yulia Zhestkova Grigsby estimated in a research report that Persian Gulf oil exports are expected to return to pre-war levels by the end of July, but also pointed out that full recovery still faces several obstacles. Navin Das, a senior crude oil analyst at Kpler, also stated that the price drop after the agreement reflects a limited decline in geopolitical risk premium in the price curve, combined with market expectations for the recovery of Hormuz flow, placing pressure on spot prices. Shipping market is not buying in: freight rates still three times higher than before the war However, in sharp contrast to the optimism in the futures market, the shipping market has not yet reflected this peace expectation. SINOPEC CORP reportedly attempted to charter a Very Large Crude Carrier (VLCC) to load Iraqi crude oil between June 25 and 30 this week, receiving six offers, all of which were close to three times the pre-war levels, and still did not finalize a deal. PetroChina's reason for not agreeing was directly stated: "There are oil tankers, but they are too expensive, and there is no guarantee that you can pass through the strait." Meanwhile, India Oil received zero bids for the same periods tender; Sinochem Group is still searching for ships. Nader Itayim, Editor of Gulf and Middle East Markets at Argus Media, pointed out that the market is too optimistic about the impact of the agreement, possibly overestimating the scale of the impact and the speed at which supplies return to normal. "Despite the existence of oil waiting to be exported in the Gulf Cooperation Council region, the increase in supply may not immediately come," he said. "Logistical bottlenecks still need to be overcome before flow resumes to normal levels." Goldman Sachs analyst Yulia Zhestkova Grigsby also wrote in the report that many shipowners still have cautious attitudes toward transiting the strait, and the risk avoidance of consignors is a potential constraint, combined with Iran's geopolitical goals during the 60-day nuclear agreement negotiation period, all contribute to uncertainty. Inventory data sends a warning: fundamentals do not support optimism The fundamentals of the physical oil market have drawn a clear warning line for this sudden drop. IEA estimates that since the outbreak of the conflict at the end of February this year, global inventories have been declining at a rate of nearly 4 million barrels per day. US crude oil inventories have dropped by over 50 million barrels in the past 9 weeks, and the inventory level at the Cushing storage center is hovering near the operating baseline that most analysts consider. For countries that have been depleting strategic and commercial reserves for months, they still need to replenish their stocks. Looking at the Brent futures curve, it is estimated that oil prices need to fall back to near the pre-war low point of $70 per barrel, which is expected to occur in March 2031 - a significant discrepancy from the aggressive pricing in the futures market. Bloomberg also points out that if Hormuz substantially restores flow, the Asian market will face another pressure: Asian refineries had already replaced disrupted Middle Eastern crude oil with US and other alternative sources, partly reducing processing volumes, and are now suddenly facing an influx of Persian Gulf crude oil. This has led to a reversal of Middle East oil futures curve to a bearish contango structure, as the market is pricing recent oversupply rather than scarcity. Agreement framework itself still leaves suspense In addition to the pace of supply recovery, the text of the agreement itself also has several ambiguities, adding additional uncertainty to the market. According to the memorandum of understanding, commercial ships will only be "exempted from tolls for 60 days," but Trump told the media that after 60 days, the strait will continue to be "toll-free," a statement that was not included in the official text of the agreement. Itayim also emphasized that this agreement is not a comprehensive peace arrangement that the market can fully rely on, but a temporary framework aimed at reducing conflicts and opening a window for subsequent negotiations, so the market will still maintain a certain risk premium in the price. Kpler analyst Navin Das also pointed out another aspect: the far end of the price curve has already begun to partially reflect the possibility of easing Iranian sanctions, but this factor has not been fully priced in - if the lifting of sanctions is formally confirmed after the 60-day negotiation window, oil prices will still face further downward pressure. The convergence of multiple analyses points to the same core contradiction: the financial market takes the signing of the agreement as a signal and swiftly digests the expectation of supply recovery; while the physical market - including shipping insurance, oil tanker scheduling, minefield clearance, and production restart - follows a completely different timeline. Currently, the market is trading a preliminary framework agreement as if it were a completed production plan, while the physical market is still waiting to see it truly implemented.