Alleged ceasefire offers hope but fundamentals still unclear - Rystad Energy’s Oil Market Update

While the question of how long the ceasefire will last remains unknown, the question for the market flipped from how high prices will go to where they will settle – will there be further erosion towards the low $60s and upwards towards the mid $70s?

Rystad Energy has analyzed the major market-moving fundamentals, spotlighting China, where Iranian oil has been flowing at significant discounts.

What changes we can expect to see in Iranian crude flows without a ceasefire lasting at least 24 hours.

However, what can be said is that Iranian crude flows may need to find new destinations depending on the outcome of peace talks.

China imported close to 11 million barrels per day (bpd) of crude, with about 10%, or 1.5 million to 2 million bpd, coming from Iran.
For Iran, almost all its oil exports go to China.

With recent US sanctions on some of the so-called teapot refineries in China and trading companies in Singapore, the flows dropped by half, to around 1000,000 barrels, leaving tankers carrying Iranian oil waiting off Shandong ports.

Although the actual imports have decreased, Iranian barrels have been accumulating on floating storage near China.
The teapot refinery sector has been playing as an outlier in China that caused some concern for the government but at the same time the teapots have assumed the risk of taking sanctioned crude oil, such as that from Iran.

Data from China’s National Bureau of Statistics (NBS) last week showed refinery runs in May were around 14.27 million bpd, close to our 14.21 million bpd forecast.

This was about 340,000 bpd lower than last year and represents the lowest month for refinery runs this year, primarily due to increased outages amid maintenance at state-run refineries and subdued activity from teapots.

Due to limited runs and higher flows in recent months, China has built a good buffer for several months, with builds in March, April and May.
As a result, it is unlikely to engage in panic buying of barrels, even if there is a total loss of Iranian barrels.

The current crude in storage could cover about 90 to 100 days of the country’s crude demand.

From the product side, both gasoline and diesel stocks are at five-year low levels, because of the reduced runs in May.

We expect to see rallying runs in June, but mainly from state-owned and mega-independent refineries.

We expect refinery runs in China to increase from an estimated 14.5 million bpd in June to 15.1 million bpd by September.

Even if flows from Iran are disrupted, we anticipate increases from other OPEC+ countries will provide ample barrels for China.

The product balances for China signal increased deficits for liquefied petroleum gas (LPG), naphtha and high-sulfur fuel oil (HSFO) in the coming months, through September or October.
Meanwhile, surpluses in middle distillates (jet fuel, gasoline and diesel) are expected to increase from near 400,000 bpd to 800,000 bpd by year-end.

This suggests there may be some calibration in the increase in the refinery runs through to October.

China has certainly avoided US LPG due to tariff and turned to LPG from the Middle East (before the onset of the recent Iran-Israel conflict) but US LPG continues to flow to China.

With sanctions gone, it only makes China more reliant on US LPG given Iran’s proximity to India, and India would procure the cheapest barrels.

Where will crude flows travel with Chinese demand falling?

Assuming oil demand from China is not there, Iran would need to find a home for its nearly 2.2 million bpd of exports (as of March 2025).

In March 2018, Iranian crude exports reached 2.75 million bpd, with flows going to more than 10 key countries in Asia-Pacific and the European Union (EU), with flows to China accounting for just around 30% of the total.

Overall, with production remaining near 4.2 million bpd and some increase in Iranian oil refining, there is a 2 million-bpd exportable surplus.

A lot of uncertainty will need to be answered in the coming months to see if Iran adheres to OPEC+ production targets in addition to whether future negotiations with the US will enable flows to the mainstream market.

It is important to note that Iranian crude is of the right quality, specifically medium sour barrels, that the global refining system needs.

Whether this leads to significant pressure on oil prices will depend on the US buying crude from different countries for its Strategic Petroleum Reserve (SPR), which could facilitate an increase in Iranian flows into the overall market.

Additionally, the decline in production from Venezuela and Russia may create opportunities for Iranian barrels to find new buyers.

It is not unreasonable to expect the US to seek deals with discounts as part of this process.
Not only crude flows, but some of the product flows will also shift.

Under our assumption of Iranian crude and products finding other destinations, Iranian LPG (not discounted) would also go to other markets, primarily India.

What’s Next for OPEC+?

OPEC+ has several potential paths ahead.

Our view is that the group will remain focused on preventing the market from slipping into contango (where forward prices exceed spot prices) even if that means accepting lower oil prices in the near term.

Market fundamentals through August appear constructive, presenting a good opportunity for OPEC+ to return some barrels to the market.

Much, however, hinges on how crude flows from Iran and Russia are reshuffled.

The International Energy Agency’s (IEA) latest projections have raised the 2025 call on OPEC+ crude by 300,000 barrels per day.

With the latest unwind, it’s worth noting that the revised targets align closely with what OPEC+ was already expected to produce, helping to neutralize bearish narratives around non-compliance or overproduction.

US shale unlikely to experience upside

In our note this week, we provided a signal for oil prices to stay pressured near the mid-$60s per barrel amid an accelerated unwinding of production cuts by OPEC+.

This will certainly have implications for US shale.

Our view is that US crude and condensate production is likely to grow by nearly 300,000 bpd year-on-year.

The oil rig count has declined since the start of the year, while gas rigs have been on an upward trajectory, albeit from a lower base.

Although crude prices have corrected and remain near $70 amid the tentative ceasefire, what is key is that West Texas Intermediate (WTI) crude backwardation (where the spot price is higher than the forward price) has widened significantly in recent times, which does not help producers or those hedging.

US shale needs contango more than a higher oil price.

The US Energy Information Administration (EIA) is expected to report a 6.5-million-barrel draw in commercial crude inventories for the week ending 20 June.

US commercial crude inventories have continued to decline and now sit more than 36 million barrels lower than they did a year ago.

This deficit is expected to remain largely unchanged over the next two weeks, providing relative support for WTI versus global benchmarks, before narrowing to around 26 million barrels below 2024 levels by 11 July.

The key takeaway for the oil markets is to observe how the ceasefire and the subsequent US-Iran deal develop.

The implications for Iran, China, Russia and OPEC+ are significant.

A correction in supply is likely to be the main theme until demand recovery takes a turn for the better.

Ceasefire agreements need to be robust and provide a clear signal to market participants for trading to return to previous levels.

For now, signals remain uncertain, and geopolitical risks persist, keeping volatility high, even as some progress towards peace is made.