Crude Oil Prices Supported by Closure of Hormuz

June WTI crude oil (CLM26) on Thursday closed up +0.15 (+0.15%), and June RBOB gasoline (RBM26) closed down -0.0130 (-0.36%).  Crude oil and gasoline prices settled mixed on Thursday.  Crude prices pushed higher on Thursday as peace talks between the US and Iran remain in limbo, keeping global oil supplies tight amid the Strait of Hormuz closure.   Gains in crude were limited, and gasoline fell on Thursday after the dollar index ($DXY) rallied to a 2-week high.  Also, signs that OPEC+ may boost its crude production are negative for oil prices.

On Thursday, OPEC+ delegates said 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.  However, any production hikes now seem unlikely, given that Middle East producers are being forced to cut output due to the war in the region.  

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." Mr. Trump also said, "Iran will make a deal or be decimated." 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.  

The International Energy Agency (IEA) said in a monthly report on Wednesday 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+ 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 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.

Wednesday's EIA report showed that (1) US crude oil inventories as of May 8 were -0.3% below the seasonal 5-year average, (2) gasoline inventories were -4.3% below the seasonal 5-year average, and (3) distillate inventories were -9.4% below the 5-year seasonal average.  US crude oil production in the week ending May 8 rose +1.0% w/w at 13.710 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.