July WTI crude oil (CLN26) today is down -4.43 (-4.25%), and July RBOB gasoline (RBN26) is down -0.1264 (-3.54%). Crude oil and gasoline prices are falling sharply today on optimism that diplomacy may finally end the Iran war and reopen the Strait of Hormuz. Crude prices remained sharply lower on a mixed weekly EIA inventory report.
Hopes that a peace deal to end the US-Iran war is near are undercutting crude prices after President Trump said today that the US is in the “final stages” of talks with Iran. On Tuesday, Mr. Trump said that Iran is “being reasonable” and that he will “maybe” give them until early next week to make a peace deal.
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Also weighing on crude prices is the discussion among NATO members of escorting ships through the Strait of Hormuz should the route be closed after early July, which could return some crude supplies to the global market.
Ramped-up geopolitical tensions are supportive for crude prices after Reuters reported Monday that Pakistan has deployed 8,000 troops, a squadron of fighter jets, and an air defense system to Saudi Arabia as part of a mutual defense pact, a deployment described as a “substantial, combat-capable force” to support Saudi Arabia if it comes under further attack. On Sunday, the UAE reported that a drone sparked a fire in a power station at the United Arab Emirates’ Barakah nuclear plant, and Saudi Arabia said it intercepted and destroyed three drones that entered its airspace.
Last Wednesday, the International Energy Agency (IEA) said in a monthly report that global observed oil inventories declined at about 4 million bpd in March and April, and that the market will remain “severely undersupplied” until October, even if the conflict ends next month.
Energy prices remain underpinned by the US-Iran war, which is keeping the Strait of Hormuz essentially closed. The ongoing conflict is exacerbating global oil and fuel shortages, as about a fifth of the world’s oil and liquefied natural gas transits through the strait. Goldman Sachs estimates that crude output in the Persian Gulf has been curtailed by about 14.5 million bpd, and that the current disruption has drawn down nearly 500 million bbl from global crude stockpiles, which could hit a billion bbl by June. Persian Gulf oil producers have been forced to cut production by roughly 6% due to the closure of the Strait of Hormuz as local storage facilities reach capacity. Last Thursday, the IEA said that more than 80 energy facilities had been damaged during the conflict, and that recovery could take as long as 2 years.
In a bearish factor for crude, OPEC delegates said last Thursday that the cartel aims to continue a series of oil quota increases over the next few months, completing the return of halted oil production by the end of September. The group already formally agreed to restore about two-thirds of the 1.65 million bpd supply cutback it made back in 2023 and said it plans to raise output targets further and to revive the final portion in three more monthly stages. On May 3, OPEC+ said it will boost its crude output by 188,000 bpd in June after raising production by 206,000 bpd in May, although any production hike now seems unlikely given that Middle East producers are being forced to cut production due to the Middle East war. OPEC’s April crude production fell by -420,000 bpd to a 35-year low of 20.55 million bpd.
Vortexa reported on Monday that crude oil stored on tankers that have been stationary for at least 7 days rose +2.7% w/w to 105.11 million bbl in the week ended May 15.
The most recent US-brokered meeting in Geneva to end the war between Russia and Ukraine ended early as Ukrainian President Zelensky accused Russia of dragging out the war. Russia has said the “territorial issue” remains unresolved with Ukraine, and there’s “no hope of achieving a long-term settlement” to the war until Russia’s demand for territory in Ukraine is accepted. The outlook for the Russia-Ukraine war to continue will keep restrictions on Russian crude in place and is bullish for oil prices.
Ukrainian drone and missile attacks have targeted at least 30 Russian refineries over the past ten months, limiting Russia’s crude oil export capabilities and reducing global oil supplies. There were at least 21 Ukrainian strikes on Russia’s refineries, export terminals, and oil pipeline infrastructure in April, knocking Russia’s average refinery runs to 4.69 million bpd, the lowest in 16 years, according to Bloomberg data. Also, US and EU sanctions on Russian oil companies, infrastructure, and tankers have curbed Russian oil exports.
Today’s weekly EIA report was mixed for crude oil and products. On the negative side, EIA gasoline supplies fell by -1.5 million bbl, a smaller draw than expectations of -2.16 million bbl. Also, EIA distillate stockpiles unexpectedly rose by +372,000 bbl, versus expectations of a -1.65 million bbl draw. On the positive side, EIA crude inventories fell by -7.86 million bbl, a larger draw than expectations of -2.5 million bbl. Also, crude supplies at Cushing, the delivery point of WTI futures, fell by -1.6 million bbl.
Today’s EIA report showed that (1) US crude oil inventories as of May 15 were -1.7% below the seasonal 5-year average, (2) gasoline inventories were -4.6% below the seasonal 5-year average, and (3) distillate inventories were -9.0% below the 5-year seasonal average. US crude oil production in the week ending May 15 fell -0.1% w/w to 13.702 million bpd, mildly below the record high of 13.862 million bpd posted in the week of November 7.
Baker Hughes reported last Friday that the number of active US oil rigs in the week ended May 15 rose by +5 to 415 rigs, modestly above the 4.25-year low of 406 rigs posted in the week ended December 19. Over the past 2.5 years, the number of US oil rigs has fallen sharply from the 5.5-year high of 627 rigs reported in December 2022.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
