Crude Prices Jump as US Blockade of Strait of Hormuz Takes Hold

May WTI crude oil (CLK26) today is up +5.91 (+6.12%), and May RBOB gasoline (RBK26) is up +0.1254 (+4.13%).  Crude oil and gasoline prices are sharply higher today after peace talks between the US and Iran broke down over the weekend and President Trump imposed a blockade in the Strait of Hormuz.  

Crude prices surged today when President Trump said the US will begin a full naval blockade of the Strait of Hormuz and threatened to attack any Iranian vessels that approach US ships in the strait.  The blockade could exacerbate global oil and fuel shortages.  Iran said it would target all ports in the Persian Gulf if its own shipping hubs were threatened.

Crude prices also have support after Saudi Arabia’s press agency said last Thursday that Iranian drone and missile attacks on Saudi energy infrastructure have taken more than 600,000 bpd of Saudi crude production capacity offline.

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.  The US vowed to blockade all vessels passing through the Strait of Hormuz today that call at Iranian ports or are headed there.  The blockade could exacerbate global oil and fuel shortages, as about a fifth of the world’s oil and liquefied natural gas transits through the strait.  Iran has been able to export crude during the war, as it exported about 1.7 million bpd in March.

Crude prices also have support after Saudi Arabia’s state producer, Saudi Aramco, raised the price of its main oil grade to Asia last week by $17 a barrel for May delivery, the biggest jump on record.

In a bearish factor for crude, OPEC+ on April 5 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.

Vortexa reported today that crude oil stored on tankers that have been stationary for at least 7 days fell -35% w/w to 89.13 million bbl in the week ended April 10, a 5-month low.

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.

Last Wednesday’s EIA report showed that (1) US crude oil inventories as of April 3 were +1.5% above the seasonal 5-year average, (2) gasoline inventories were +3.6% above the seasonal 5-year average, and (3) distillate inventories were -4.2% below the 5-year seasonal average.  US crude oil production in the week ending April 3 fell -0.4% w/w to  13.596 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 April 10 was unchanged at 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.