US-Iran Peace Hopes Weigh on Crude Oil Prices

July WTI crude oil (CLN26) on Friday closed down -1.54 (-1.73%), and July RBOB gasoline (RBN26) closed down -0.0665 (-2.14%).  Crude oil and gasoline prices retreated on Friday, with crude oil falling to a 5-week low.  Crude prices are under pressure after the US and Iran tentatively agreed to extend a ceasefire by 60 days, fueling optimism that the Strait of Hormuz may reopen soon.  

The markets are awaiting President Trump's approval of a preliminary deal between the US and Iran to extend a ceasefire by 60 days and reopen the Strait of Hormuz.  President Trump said Friday he's making a "final determination" on a preliminary deal to extend a ceasefire with Iran.

However, even if a truce extension is agreed, several hurdles remain before crude flows can resume.  Among them, mines in the Hormuz waterway must be removed, shut-in oil fields may take months to restart, and damage to energy infrastructure from drone and missile strikes needs to be repaired.

Earlier this month, 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.  Earlier this month, 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 on May 14 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 fell -18% w/w to 87.05 million bbl in the week ended May 22.

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.  On Friday, Russian President Putin said there are no peace talks scheduled with Ukraine in the near future.

Ukrainian drone and missile attacks have targeted at least 30 Russian refineries over the past eleven 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.

Thursday's EIA report showed that (1) US crude oil inventories as of May 22 were -2.0% below the seasonal 5-year average, (2) gasoline inventories were -5.5% below the seasonal 5-year average, and (3) distillate inventories were -10.8% below the 5-year seasonal average.  US crude oil production in the week ending May 22 rose +0.1% w/w to 13.715 million bpd, mildly below the record high of 13.862 million bpd posted in the week of November 7.

Baker Hughes reported Friday that the number of active US oil rigs in the week ended May 29 rose by +4 to an 11-month high of 429 rigs, well 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.