Why did oil fall below $90 even while the Strait of Hormuz remained disrupted?

On the surface, the latest plunge in oil prices appears odd. After all, the Strait of Hormuz continues to be in peril. U.S. Crude futures traded under $90 per barrel and Brent crude fell precipitously from its recent highs. Even on September 23, WTI dipped to $89.66 despite lingering concern regarding the shipping lane. Prices reflect perceptions about future developments related to supply/demand, not the actual flow of oil through the Strait at that moment.

The major factor behind the latest plunge was the change in the expectations of traders regarding the future of the Strait of Hormuz. On September 22nd, Iran stated that there is a possibility to resume its operation within a week depending on certain conditions. This resulted in the perception that a prolonged period of time associated with the threat of disruption of the Strait is over. For traders of oil assets, the difference between "closed" and "temporarily closed" is significant. When shipments can resume within days/weeks, oil buyers do not need to account for loss of several millions barrels on permanent basis.

The Strait was closed. But not shut down entirely. According to Reuters, the flow fell significantly from the levels but the average amount was about 4-5 million barrels a day. Industry estimates set the level of daily export in the range of 6 to 8 million barrels. According to S&P Global, the range of export from 6 to 10 million barrels a day in early September illustrates the difficulty of

tracking exports, since some vessels tried to hide their origin. The main idea here is that a disrupted route can still send huge amounts of oil; hence, there is no such shortage for buyers.

The Gulf producers have changed their export routes and ports. For instance, Saudi Arabia and the UAE have changed the export route by using Saudi Arabia's Red Sea port of Yanbu and Fujairah ports of the UAE. As noted in the International Energy Agency, these routes helped to offset most of the losses because of Hormuz exports. The market understood that a disruption of one chokepoint did not mean the loss of supply for the world.

Concerns regarding demand are rising. High energy prices may affect the economy, and its demand for fuel. In the meanwhile, there is an opportunity for shoppers and companies to modify their behavior, and the ability for refineries and speculators to utilize inventories. According to the International Energy Agency, weakening oil demand, emergency releases, higher output from non-Middle East producers, and alternative routes are absorbing some of the impact. It creates the circle where the supply shock will be in effect for the longer it goes on, and hence the market requires less extra supply.

Also, Saudi export logistics. Information about Saudi Arabia being ready to export oil from its Red Sea port of Yanbu improved the picture of Gulf supply. It reduced the additional cost which was incorporated into the price due to increased risk. Oil traders were paying additional costs for the risk that the conflict would cut supply from the world market. As that risk declined, it removed some of that cost.

It doesn't mean the Hormuz issue is unimportant or the oil market returned to normal. Physical oil supplies remain low, shipping costs are high. Any renewed flare-up may send prices sharply higher. Rather, it demonstrates the forward-looking nature of markets. Oil does not have to clear the Strait of Hormuz completely for its prices to fall; all that traders require is that the closure will be less severe than the previous ones. In summary, what the market is doing now is pricing in the risk of an eventuality tomorrow.