Oil Prices Soar as Iran Shuts Down US-Iran Ceasefire Negotiations

July WTI crude oil (CLN26) are up +6.21 (+7.11%), and July RBOB gasoline (RBN26) is up +0.1004 (+3.31%).

Crude oil prices are sharply higher today after Iran’s Tasnim news agency reported that Iran’s government said in a statement that it halted the exchange of messages with the US regarding a draft ceasefire agreement due to Israel's stepped-up attacks on Lebanon. Iran has consistently said there would be no US-Iran ceasefire without a truce in Lebanon.  President Trump said Sunday night, "It will all work out in the end," even though attacks continue on both sides and Israel continues to launch attacks in Lebanon. 

Today’s Tasnim report also said that Iran and its affiliates were considering the closure of the Bab el-Mandeb Strait, at the southern end of the Red Sea, which would further disrupt global oil shipments.

Prior to today’s report, the markets hoped for a deal between the US and Iran to extend a ceasefire by 60 days and reopen the Strait of Hormuz.  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 soon.  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.

Oil prices also saw support today after Bloomberg reported that Russia banned jet fuel exports after Ukraine’s attacks on Russian oil refineries reached a record high in May.  Russia’s refinery runs in May fell -13% y/y to 4.58 million bpd, the lowest since October 2009, according to Bloomberg.  Also, US and EU sanctions on Russian oil companies, infrastructure, and tankers have curbed Russian oil exports.

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 rose +8.8% w/w to 91.06 million bbls in the week ended May 29.

Last 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 last 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.