A significant premium has emerged for VLSFO prices over Brent since the outbreak of war. Image Credit: Ship & Bunker

While the US and Iran appear closer to a deal at least temporarily opening the Strait of Hormuz, the bunker market should not expect a sudden drop in prices to pre-war levels if it works out, according to global trading firm Dan-Bunkering.

The market should expect an immediate drop of less than 10% in Brent crude in the event of the Strait of Hormuz reopening, Dan-Bunkering said in its weekly note to clients.

"Initially, we will undoubtedly see a significant price decline," the company said.

"However, the decline may well be smaller than many expect.

"A reasonable estimate could be Brent slightly below 90, as we saw in April when the strait was open for 24 hours.

"It is also important to remember that the market is already pricing in a relatively quick reopening."

ICE July Brent futures closed at $94.29/bl on Wednesday. A drop to $90/bl from that level would imply a fall of about $32/mt in bunker prices, an unusually large daily move but taking prices nowhere near the lower levels seen before the recent conflict.

A drop nearer ten times that size would be needed to return the bunker market to prices seen in February.

Prices are unlikely to drop more sharply because of the level of disruption already delivered to global oil markets that can not be resolved immediately by Hormuz transits resuming. Traffic through the Strait of Hormuz is highly unlikely to be brought back to pre-war levels immediately, particularly with increased Iranian supervision and over which ships are allowed to move through, and large quantities of oil will need to be moved from storage in the Gulf before crude production there can be ramped back up to previous levels.

Dan-Bunkering advises waiting for Brent prices nearer $80/bl before locking in supply for the rest of the year.

"We expect oil prices to be in the USD 80-100 range in the third and fourth quarters, assuming the Strait of Hormuz has reopened," the company said.

"That is far above the level before the war.

"If we see a reopening of the Strait, we may very well see a so-called undershoot in prices for a brief period.

"If Brent dips into the low 80s, we would see that as a very attractive level for consumers to enter into a fixed-price agreement for the rest of the year and into H1 2027."

A significant premium has emerged for VLSFO prices over Brent since the outbreak of war. Ship & Bunker's G20-VLSFO Index of prices at 20 leading bunkering locations has averaged at an 18.8% premium to Brent since the start of March, compared to an average discount of 0.8% in the previous three months.

Whether this premium starts to subside in a meaningful way will be a major point of interest for the shipping and bunkering industries about whether the conflict-related disruption to this market is being resolved.