Crude Oil Prices Surge on Concern Over Prolonged Closure of Hormuz

June WTI crude oil (CLM26) on Tuesday closed up +4.11 (+4.19%), and June RBOB gasoline (RBM26) closed up +0.0979 (+2.72%).  Crude oil and gasoline prices settled sharply higher for a second day on Tuesday after President Trump cast doubt over the ceasefire with Iran, which could lead to the escalation of hostilities that keep the Strait of Hormuz closed.

Crude prices raced to their highs Tuesday afternoon when President Trump said, "Iran will make a deal or be decimated."  Crude prices continue to climb after President Trump and Iran rejected each other's latest peace proposals to end the 10-week conflict.  President Trump called Iran's response to his peace proposal a "piece of garbage" and said that the current ceasefire was on "life support."

Crude prices are also supported after President Trump said on Monday that the US may restart the operation as soon as this week to guide commercial ships through the Strait of Hormuz with naval and air support.  Saudi Arabia and Kuwait have lifted restrictions on the US military's use of their bases and airspace when Iran launched missiles and drones at the UAE in response to the US effort to open the strait.  Saudi Arabia and Kuwait had blocked the US military's use of their bases and airspace after senior US officials downplayed Iranian attacks on the Persian Gulf in reaction to opening the strait.

Energy prices remain underpinned by the US-Iran war, which keeps the Strait of Hormuz 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 International Energy Agency (IEA) said that about 14 million bpd of global oil supply has been shuttered by the Iran war and the closure of the Strait of Hormuz.  The IEA also said that more than 80 energy facilities have been damaged during the conflict, and a recovery could take as long as two years.

In a bearish factor for crude, OPEC+ on May 3 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+ 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 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 fell -33% w/w to 103.90 million bbl in the week ended May 8.

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 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.

The consensus is that Wednesday's weekly EIA crude inventories fell by -2.0 million bbl, and gasoline supplies fell by -3.0 million bbl.

Last Wednesday's EIA report showed that (1) US crude oil inventories as of May 1 were +0.7% above the seasonal 5-year average, (2) gasoline inventories were -3.1% below the seasonal 5-year average, and (3) distillate inventories were -10.1% below the 5-year seasonal average.  US crude oil production in the week ending May 1 fell -0.1% w/w at 13.573 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 8 rose by +2 to 410 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.