Sparta: Oil prices are too good to be true; as are Hormuz assumptions

• The MoU text is on track for Friday signing. Iran has “won” on paper. The draft text shows a remarkably strong deal for Tehran, and they’ll presumably sign it. They get sanctions relief, crude waivers, and agree to open traffic through the Strait with zero mention of tolls. Long-term, the nuke question lingers and Israel remains a total wildcard. The US Administration for now appears to have made many concessions but that may be domestically acceptable enough given the conflict's deep unpopularity. Chances for some degree of re-ignition in conflict between some parties involved is high, particularly in Lebanon, jeopardising the deal.
• Expect a US$5 knee-jerk drop on signing. Momentum is firmly in the driving seat right now, completely crowding out any other market story or trend. If/when the deal gets signed, expect Brent to drop another US$5-10/bbl lower. After the complete wash-out, it’ll be time to track the shipping reality in the AG, and what the other large pieces of the market are doing (demand, US exports, Chinese imports). Strong chances that we are already in very oversold paper crude territory, and will be even more so upon signing.
• There is a small but growing chance (10%) that summer commercial crude balances might not look that short. If we look at what could cap the upside, there is a scenario where we aren't that short on paper for the July - August stretch, at least on commercial crude. It requires AG supply/traffic normalising very rapidly, the politics to stay clean, SPR flow steady, and the other solvers, in particular China’s low crude buying (big "IF"), to stay put. We might even manage with lower US exports (note MEH spread now negative). If that all happens, the summer crude balance suddenly doesn't look all that bad. This could trump the fact that we have very low stocks for a while. But it could manifest rather in physical crude premiums staying weak even as paper crude is gradually pushed back into decent backwardation and flat price to eg. US$90+/bbl.
• Decent chances (50%) Hormuz shipping won't normalize for some time. Talk of full flows within a week or two is too optimistic. Shipowners are still highly uncomfortable. Before tonnage commits en masse, we need P&I clubs to get comfortable, and lanes to be swept for mines. Expect an initial uptick in traffic from owners already pre-positioning, but not a maximum ballasting rush to the AG just yet. Outbound traffic may create more positive optics than the sustainable reality in the initial stages.
• The AG supply gap will return in two sticky waves. Trapped vessels will exit the Gulf first, followed by inbound ballasters (bullish TD3c rates expected). The first roughly 50% of the lost Arabian Gulf supply comes back fast once ships are in place, but the rest is a slog over perhaps months. A few unknowns and likely hiccoughs along the way.
• The "Verbal SPR" capped the longs very well. The US did a phenomenal job jawboning the market down over recent months. This constant dangling of a real deal acted as a "Verbal Price SPR," scaring longs out of pricing the low inventory situation. Ironically, it might actually require a finalised, firm deal path to stop this bleeding so the market can start pricing real balances again, assuming that not all the normalisation materialises perfectly.
• Refinery lag vs. demand return. Refined products will take longer to normalise than crude because refineries are slower to spool back up and supply chains take longer to rebalance. Lower retail prices mean end-user demand should snap back relatively quickly. If there is still room for pricing to spike (outside of politics/headlines), then the chance is greater for products, though the most oversold now looks to be paper crude.

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