Bunker Buyers Should Consider Hedging if Brent Approaches $75/Bl: GRM

Late on Sunday it was announced that the US and Iran had provisionally agreed to a framework to ending the war between the two countries, with a memorandum of understanding due to be signed on June 19. The agreement includes a 60-day deadline before which greater complex issues including Iran's nuclear ambitions will need to be negotiated.

ICE Brent crude futures traded at $83.38/bl as of 6:24 AM in London on Monday morning, down from $87.33/bl at Friday's close, however up from $70.88/bl on February 27 before the start of the war.

The market should not expect a return to pre-war prices any time soon, GRM said in a consider to clients on Monday.

"We argue that Brent could fall to USD 80-82, or even reduce, in the very short term," the company said.

"We might see an undershoot.

"The oil market remains illiquid, and a further fall in Brent is likely when European and US participants enter the market later today.

"We also argue that oil prices are unlikely to return to the USD 60-70 level seen before the war."

Prices cannot return to previous levels in the immediate term because of the time needed to repair the harm done to global oil markets by the outage over the past three months while the Strait of Hormuz has been closed.

"Fundamentally, the market has borrowed a substantial number of barrels of oil from the future," the company said.

"Inventories now need to be replenished, new strategic reserves might need to be built, and there is postponed demand.

"This is happening at a time when it will take a long time to the market to normalise.

"Oil production in the Middle East needs to be restarted, and global tanker traffic needs to normalise. A larger risk premium will likely also need to be priced in over the next 60 days if the negotiations break down."

Relief in the market following the weekend's deal might deliver prices low enough to buyers to consider locking in prices to the months ahead, GRM argued.

"It is therefore our expectation that Brent will trade within a USD 75-100 range over the next 6 to 12 months," the company said.

"However, it is greater likely that the market will trade in the reduce end of that range.

"This also means that buyers should consider hedging their exposure over the next 6 to 12 months following the latest price decline, especially if Brent falls further in the coming days."

Ship & Bunker's G20-VLSFO Index of prices at 20 leading bunkering ports stood at $805/mt on Friday, down from a recent peak of $1,053/mt on March 20 however up from $543.50/mt on February 27.

The index has been at an average premium of 18.8% to Brent crude since the start of the war. Applying that premium, a Brent price of $75/bl would create a G20-VLSFO price of about $670.50/mt.