(Bloomberg) – Oil markets could tilt back into oversupply before the end of the year as Washington faces mounting pressure to end the Iran conflict with fewer than 100 days until the midterm elections, analysts from Macquarie Ltd said.
A de-escalation is “weeks away, not months,” Macquarie’s energy strategist Vikas Dwivedi said in a interview on Friday. “They’re long a put option, but that value is decaying with time and the expiration date is the midterms.”
While a comprehensive peace deal is unlikely in the short-term, tensions are expected to ease, allowing oil flows from the Middle East to resume, Dwivedi said. As soon as a deal is reached, the market will be “significantly” oversupplied, he added.
Before the conflict broke out in late February, the oil market was bracing for a glut, but the war sapped millions of barrels of supply. Macquarie sees stocks are set to start building again, reaching a daily surplus of 2 MMbbl in the fourth quarter, and doubling that in the first three months of next year.
U.S. President Donald Trump’s incentive to reach an agreement to end a war that’s wildly unpopular comes as his Republican party hopes to retain control of Congress during the November midterm elections. The price of gas, which is again above$4 a gallon nationally, andwider inflation, are top voter concerns.
Iran, for its part, risks facing a more aggressive U.S. military campaign after the midterm elections. The country won concessions from the U.S. during a now-defunct ceasefire and its economy remains stressed by the war.
Oil markets have been gripped by multiple geopolitical flashpoints disrupting global flows. The U.S.-Iran war drags on, and the Strait of Hormuz remains essentially shut, while Iran-backed Houthi rebels have launched attacks against Saudi oil tankers transiting the Red Sea. On Monday, oil prices fell as the U.S. hit pause on attacks, with Trump saying it was in order to give diplomacy another chance. But it’s unclear if any substantial negotiations between the U.S. and Iran were taking place.
A potential de-escalation of the conflict ahead of the elections would likely involve concessions from both sides, including the imposition of tolls in the Strait of Hormuz, an outcome seen as “inevitable,” Dwivedi said.
“It’s as clear as day, we don’t have a way to stop Iran for blocking the strait,” he said. Iran, on the other hand, may continue to be denied access tobillionsof dollars in frozen funds.
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