The Strait of Hormuz is reopening faster than expected, after the US and Iran signed a memorandum of understanding (MoU) and launched indirect talks in Qatar to discuss the flow of shipping.

Global oil prices have fallen back, providing respite to consumers at the petrol pump. For a third consecutive day on Thursday, oil prices dropped about 1 percent, after Qatar said Iran and the US had made progress in discussions about the critical waterway, which handled one-fifth of global oil supply before the US and Israel first launched strikes on Iran on February 28.

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But as oil flows suddenly resume, there is alarm over the weakening of oil demand, mainly driven by China – the world’s largest oil importer – slashing imports.

Investment banking group Morgan Stanley cut oil forecasts for the second time in two weeks, warning of the risk of a glut – a severe oversupply of crude oil in the global market that outpaces consumer demand.

Analysts say such a forecast is contingent on Chinese oil imports remaining at a low level, as well as on the fragile truce between the US and Iran remaining on solid ground.

How much have oil flows resumed?

The June 17 MoU between the US and Iran triggered a 60-day negotiation period to reach a permanent peace deal that includes the onwards passage of many loaded tankers which had been stranded in the Strait of Hormuz since the start of the war.

Under the terms of the interim deal, ‌Iran agreed to let ships transit through the passageway for 60 days without charge, but the wording of the agreement has been controversial, with Tehran arguing that it allows it to keep control of the strait in joint accord with Oman.

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Last week, the US launched strikes on Iran, citing an attack against a commercial vessel as a motivation, in an indication of the fragility of the agreement.

Despite high geopolitical uncertainty, oil transit resumed faster than many had predicted, pushing down prices. Morgan Stanley was quoted by Bloomberg as saying that 35 oil and gas tankers had exited the Strait of Hormuz on Thursday, marking the first time the level had returned to within the range typical of pre-war levels.

Brent futures – the global benchmark indicating the price of oil – fell $0.79 ⁠, or 1.1 percent, to $70.78 a barrel by 06:42 GMT on Thursday, while US West Texas Intermediate crude fell $0.84, or 1.2 percent, to $67.74 a barrel. Both benchmarks fell more than 1 percent in the previous session.

Is there a risk of an oil glut?

Mohammad Reza Farzanegan, professor of economics at the Center for Near and Middle Eastern Studies (CNMS) and the School of Business and Economics at Philipps-Universitat Marburg, Germany, sounded a note of caution over the Morgan Stanley forecast.

“I would be cautious in treating the surplus forecast as settled,” he told Al Jazeera. “The market is now pricing a recovery of Hormuz flows and a temporary opening for Iranian oil exports, but both assumptions remain fragile.”

Prices could rise again, depending on security in the Strait of Hormuz. But the passageway is not the only factor at play.

Given the skyrocketing of oil prices in recent weeks, China has downsized its imports, tapping instead into commercial stockpiles. In parallel, while it had traditionally imported roughly half of its crude oil from the Middle East before the war, it has now resorted to importing crude from Russia, Kazakhstan, Brazil, Indonesia and Venezuela.

This served as an equaliser in the global oil markets, keeping oil prices from spiking further during the conflict. But as the Strait of Hormuz reopens, China’s imports remain dramatically lower while producers increase their output.

Additionally, as Washington temporarily lifts oil sanctions on Iran, oil exports from the war-torn country are picking up again. Bloomberg reported that more than 20 million barrels of Iranian crude have been ready to sail for at least seven days, up nearly 18 percent from a week earlier, according to global trade intelligence group Kpler.

The overall estimated volume of the country’s oil loaded onto ships – either in transit or stationary – ranges from 58 million to 68 million barrels since the US sanctions waiver kicked in last week, according to data from Vortexa and Bloomberg.

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More than 90 percent of these cargoes already on the water have no clear destination, as independent Chinese refiners – Iran’s main customers prior to the conflict – make deals elsewhere.

Kevin Morrison, energy finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), said, therefore, Morgan Stanley’s forecast “is contingent on Chinese oil imports remaining at a lower level, instead of returning to pre-conflict level”.

However, there is another factor which could add weight to predictions of a glut of oil, Morrison said: the increase in oil production from the Americas, with the US, Canada, Brazil and Argentina all boosting oil outputs this year. The US, the number one oil producer in the world, set a new record in April, producing 13.934 million barrels per day (bpd) – the highest monthly production rate ever recorded.

However, the analyst said the oil glut forecast “relies on the US and Iran maintaining their agreement and a full resumption of oil supplies [in the Strait of Hormuz] back to the pre-conflict level of 20 million barrels a day”.

“This volume is unlikely to be reached until sometime next year given the damage done to some of the production infrastructure during the conflict,” Morrison added, referring to Iranian strikes on US assets and energy infrastructure in countries in the Gulf while US-Israeli strikes on Iran continued.

So, will there be a surplus of oil on the market?

Shipping data from PortWatch shows a partial and slow recovery of transits through the Strait of Hormuz, rather than full normalisation.

According to Farzanegan, at CNMS, oil tanker arrivals and tonnage collapsed after early March following the start of the war on Iran, remaining very low through April and May, and beginning to recover only in late June as a result of the US-Iran negotiations.

“Even then, the seven-day moving average remains clearly below the prior-year level,” he said. “This suggests that additional barrels may return to the market, but the logistical recovery is still incomplete.”

US sanctions relief for Iran is also set to expire on August 21. “It is unclear whether this opening will survive beyond August,” Farzanegan said. If it is not extended, this will put further pressure on oil supply.

Additionally, the analyst said, the US mid-term elections in November may also trigger the closure of the strait if there is a resumption of hostilities between Iran and the US. “If Republicans fear losses, the Trump administration may face pressure to avoid an oil-price shock before the vote via military operation in the Persian Gulf,” he said.

As more barrels return to flow through the Strait of Hormuz in the short term, geopolitical uncertainty could quickly restore a security premium.

“I would therefore describe the outlook as a temporary surplus risk under high political uncertainty,” Farzanegan concluded, “rather than a stable oil glut”.