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Key US oil grades have slumped to trade at a discount again as a gush of crude flows through the Strait of Hormuz and a recent spike in demand for American exports fades.

US sour crude benchmark Mars fell to the lowest level since early 2023 this week while oil prices in Houston, the Gulf Coast trading hub, weakened in recent days to levels not seen since the Covid-19 pandemic. 

The war in Iran sent premiums for US oil surging and drained inventories to the lowest in decades as buyers across Asia and Europe sought to replace supplies trapped in the Persian Gulf.

Now, early signs show that trend reversing as the largest energy supply crunch in history eases and investors brace for a glut in the near term.  

“Practically the whole market is getting weaker,” Neil Crosby, head of research at Sparta Commodities said in a interview with Bloomberg. With more sour crude exiting the Strait of Hormuz, US and Latin American oil grades are under pressure, Crosby added.

Medium sour US grade Mars traded at a $3 discount to Nymex futures Tuesday, the steepest discount since January 2023, according to Link Data Services. The surge in demand for US crude amid the Iran war sent Mars to a near $18 premium to futures in late March. But the grade returned to pre-war pricing in June and has continued to fall to multi-year lows.

The weakness in Mars also comes as increasing volumes of crude from the strategic reserve, similar in quality, hits the market. The US is proceeding with its plan to release all 172 million barrels from the emergency reserve despite a drop in oil prices. 

Meanwhile, Permian basin oil sold in the largest US export market of Texas traded at a discount to futures for the majority of last week, selling at the steepest discount since 2020 on Thursday. That Magellan East Houston grade, like Mars, saw a massive premium at the peak of the war, trading almost $8 more than futures prices as foreign buyers bid up export cargoes.

The price drops come as Asian nations, in particular, that drew heavily on US oil during the war lower their imports of US crude as freight costs surge. With a growing glut of Persian Gulf oil, some Asian refiners are even trying to resell their supplies to the US, a sharp shift from only weeks prior when the US was the back stop to global crude markets.

“WTI and other US grades’ export arbs are no longer looking particularly great, both due to physical weakness in competitor crudes from other regions, but also due to the narrow WTI/Brent spread,” Sparta’s Crosby said. The narrow spread between WTI and the global oil benchmark Brent is partly a function of low US oil inventories, particularly at the key pricing hub of Cushing, Crosby said.

Inventories in Cushing, Oklahoma — the largest US commercial oil storage hub — have been closely watched by traders as stocks fell for more than two months. In government data released Wednesday, Cushing stockpiles rose for the first time in 10 weeks but remain at the unusually low level of below 20 million barrels.

Across the US, total commercial petroleum stockpiles are sitting at the lowest level since March 2025. When including government reserves, crude stocks are at the lowest since 1984.

Replenishing strategic reserves will likely take years, traders said, but the key driver of recent draw downs is already returning to pre-war levels. Crude exports fell last week to the lowest level since late March with the US sending just over 4 million barrels of oil abroad each day compared to a peak of near 6.5 million daily barrels in late April.

(June 30): Morgan Stanley cut oil forecasts for the second time in about two weeks as flows through the Strait of Hormuz return faster than expected, while strong US supply and weak Chinese demand raise the risk of a glut.

Dated Brent — a benchmark for physical transactions — is expected to average US$75 a barrel in the third and fourth quarters, down by US$15 and US$5 respectively, analysts including Martijn Rats said in a note. Outlooks for all four quarters of next year were also cut, with Dated seen at US$70 at the end of 2027.

“The Strait is reopening faster than expected, yet the ‘twin solvers’ of high US exports and low Chinese imports remain in place,” they said in the note, which followed an earlier round of reductions in a mid-June report. “As attention turns to 2027, the market has come full circle — back to surplus.”

Brent futures — the global benchmark — have collapsed about 30% this quarter as the US and Iran reached an interim peace that’s allowed some traffic through Hormuz to resume. The rapid shift has prompted analysts to revisit their forecasts, with Goldman Sachs Group Inc also paring its outlook.

While traffic in the chokepoint slowed over the weekend after a flare-up that saw two ships hit, there were still indications tanker companies are willing to navigate Hormuz. That’s a critical step toward returning the global market to normal and unlocking millions of barrels of supply from the region.

Morgan Stanley said it counted 35 oil and gas tankers exiting the Persian Gulf through the strait on Thursday — the first time the level returned to the 30-to-40 range typical before the conflict started in February. To balance the oil market in 2027, flows through Hormuz need to recover to only about 65% of the pre-conflict level, or about 11-to-12 million barrels a day, the bank said.

Brent futures, which rose to a peak above US$126 in April, have erased their war-time gains as Iran and the US continue talks aimed at permanently ending the war. The most-active September contract traded at US$73.47 on Tuesday.