May WTI crude oil (CLK26) on Tuesday closed up +0.54 (+0.48%), and May RBOB gasoline (RBK26) closed down -0.0030 (-0.09%). Crude oil and gasoline prices settled mixed on Tuesday, with crude oil posting a 4-week nearest-futures high. Crude prices rose on concerns that the war in Iran will escalate if Iran fails to meet President Trump’s demand to reopen the Strait of Hormuz by 8 pm tonight. Crude prices fell from their best level, and gasoline slid into negative territory Tuesday afternoon after Axios reported progress had been made in the past 24 hours in talks between the US and Iran.
Crude prices initially surged on Tuesday when Axios reported that the US conducted strikes on military targets on Kharg Island, and Israel told Iranians to refrain from using their country’s railway network. Also, Iran pressed on with attacks across the Persian Gulf, dimming chances for peace. President Trump said that a “whole civilization will die tonight” if Iran does not make a deal to reopen the Strait of Hormuz. Iran warned it will respond to escalated US strikes by ramping up its own attacks on energy infrastructure in the Persian Gulf.
The Strait of Hormuz remains essentially closed, limiting global oil supplies and boosting crude prices. Persian Gulf oil producers have been forced to cut production by roughly 6% as local storage facilities reach capacity. The Strait of Hormuz normally handles a fifth of the world’s oil. The International Energy Agency (IEA) said that more than 40 energy sites across nine Middle Eastern countries have been “severely or very severely” damaged and require lengthy repairs. The IEA warned that even if the war were to end within a few weeks, it would still take time for normal flows through Hormuz to resume.
Concerns that the Iran war could widen throughout the Middle East are also bullish for crude prices. Saudi Arabia agreed to give the US military access to King Fahd Air Base, and the UAE said Iranian nationals aren’t allowed to enter or transit the country. Iran’s Middle Eastern neighbors are growing frustrated with Iran, which has responded to US and Israeli attacks by hitting targets in several nearby nations.
Crude prices also have support after Saudi Arabia’s state producer, Saudi Aramco, raised the price of its main oil grade to Asia by $17 a barrel for May delivery, the biggest jump on record.
In a bearish factor for crude, OPEC+ on Sunday said it will boost its crude output by 206,000 bpd in May, although that production hike now seems unlikely given that Middle East producers are being forced to cut production due to the Middle East war. OPEC+ is trying to restore all of the 2.2 million bpd production cut it made in early 2024, but still has another 827,000 bpd left to restore. OPEC’s March crude production fell by -7.56 million bpd to a 35-year low of 22.05 million bpd.
Mounting crude supplies in floating storage are a bearish factor for oil prices. According to Vortexa data, about 290 million bbl of Russian and Iranian crude are currently in floating storage on tankers, more than 40% higher than a year ago, due to blockades and sanctions on Russian and Iranian crude. Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least 7 days fell -3.9% w/w to 130.25 million bbl in the week ended April 3.
The most recent US-brokered meeting in Geneva to end the war between Russia and Ukraine ended early as Ukrainian President Zelenskiy 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 28 Russian refineries over the past eight months, limiting Russia’s crude oil export capabilities and reducing global oil supplies. Also, since the end of November, Ukraine has ramped up attacks on Russian tankers, with at least six tankers attacked by drones and missiles in the Baltic Sea. In addition, new US and EU sanctions on Russian oil companies, infrastructure, and tankers have curbed Russian oil exports.
The consensus is that Wednesday’s weekly EIA crude inventories rose by +500,000 bbl, and gasoline supplies fell by -1.3 million bbl.
Last Wednesday’s EIA report showed that (1) US crude oil inventories as of March 27 were +1.4% above the seasonal 5-year average, (2) gasoline inventories were +4.2% above the seasonal 5-year average, and (3) distillate inventories were -2.2% below the 5-year seasonal average. US crude oil production in the week ending March 27 was unchanged at 13.657 million bpd, mildly below the record high of 13.862 million bpd posted in the week of November 7.
Baker Hughes reported last Thursday that the number of active US oil rigs in the week ended April 3 rose by +2 to 411 rigs, just 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
