Gulf stocks fall as oil prices retreat to pre-war levels

Gulf stock markets experienced a decline on Thursday as oil prices retreated to levels seen before the conflict, influenced by a preliminary agreement between the U.S. and Iran. While futures markets have rapidly adjusted to anticipate increased supply and reduced geopolitical risk, the physical oil market faces a slower path to normalization.

Traders have begun to price in a scenario where the Strait of Hormuz reopens, allowing for a resumption of Gulf exports and a fading of the energy shock that previously drove gasoline prices higher. However, the physical movement of oil is constrained by factors such as tanker routes, insurance markets, shipping backlogs, refinery operations, and critically, depleted inventories.

The U.S. Strategic Petroleum Reserve, for instance, has been drawn down to its lowest level since 1983. This depletion creates an "inventory trap": while increased supply is bearish for prices, the necessity of restocking depleted inventories introduces bullish demand. This restocking demand could support oil prices, even as the market anticipates relief.

Furthermore, gasoline prices are not solely determined by crude oil costs. Refining margins, taxes, distribution expenses, and seasonal demand patterns also play significant roles. The summer driving season, for example, adds pressure to the market. Therefore, even as crude prices ease, gasoline prices may not return to pre-war levels as quickly as futures markets suggest, due to these underlying physical and logistical constraints.