The uncertain pace of supply recovery in the Middle East and the continued rapid drawdowns of global inventories make the case that oil price volatility would drag on during the 60-day U.S.-Iran negotiation window, David Fyfe.

As the U.S. and Iran formally signed an agreement to reopen the Strait of Hormuz, oil prices continued their slide this week and Brent Crude was as trading at around $77 per barrel in Asian trade on Thursday, as the market hopes for a quick recovery of the lost oil supply.

Brent Crude prices fell to below $80 per barrel for the first time since March, but some analysts think oil has become oversold, especially amid lingering uncertainties about pretty much everything surrounding the return of Middle Eastern supply.

The memorandum of understanding to launch 60-day negotiations, extendable with mutual consent, means nothing has been resolved between the U.S. and Iran.

It’s not clear how long the expected imminent reopening of the Strait of Hormuz will take—Iran has to clear mines from the chokepoint, while Middle Eastern producers cannot return the 12 million barrel per day of production they had shut in “at the flick of a switch,” Argus Media’s Fyfe says.

“An awful lot of questions about just how quickly supply can be returned to the market” remain, the economist said.

Moreover, global oil stocks are very low and the market is currently in a deficit.

“It wouldn’t take much for prices to spike again,” Fyfe said, commenting on the uncertainties about how quick supply could return.

Global oil stocks are drawing and will continue to draw at a pace of about 2.5 million bpd in the third quarter even with a gradual return of supply, adding to price volatility, according to Fyfe.

Source: Oilprice