Crude Oil Prices Finish Sharply Higher Amid Tightening Global Supplies

June WTI crude oil (CLM26) on Monday closed up +3.24 (+3.07%), and June RBOB gasoline (RBM26) closed up +0.0588 (+1.59%).  Crude oil and gasoline prices rallied sharply on Monday, with crude posting a 3-week high and gasoline posting a nearly 4-year nearest-futures high.  Crude prices soared on Monday amid doubts about the progress of peace negotiations to end the US-Iran war that is keeping the Strait of Hormuz closed and tightening global oil supplies.   However, crude prices dropped more than -$2 a barrel in post-market trading Monday afternoon when President Trump said he canceled a scheduled attack on Iran on Tuesday after Qatar asked him to hold off.

Harsh rhetoric from President Trump boosted crude oil prices when he said the "clock is ticking" on Iran, and it "better get moving FAST on a peace deal, or there won't be anything left of them."  Also, crude prices rose after Iran said that, despite draft changes, US demands for ending the war were "excessive and unrealistic."

Ramped-up geopolitical tensions are supportive for crude prices after Reuters reported 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.

Crude prices moved lower briefly on Monday after Tasnim, Iran's semi-official news agency, reported that the US has proposed a temporary waiver on Iran oil sanctions until a final peace agreement is reached.

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.

Last 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 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.