Crude Oil Prices Whipsaw Sharply Lower on Iran Peace Hopes

July WTI crude oil (CLN26) on Thursday closed down -2.32 (-2.58%), and July RBOB gasoline (RBN26) closed down -0.0085 (-0.27%).

Crude oil and gasoline prices gave up an early advance and settled sharply lower on Thursday after President Trump said he canceled planned military strikes on Iran, signaling a peace deal is imminent.  Crude prices initially whipsawed higher on Thursday after President Trump said the US will continue attacks on Iran and threatened to seize Kharg Island, Iran’s main crude exporting hub. 

Crude prices were extremely volatile on Thursday, whipsawing higher and lower several times.  Prices retreated on Thursday afternoon when President Trump said he canceled planned military strikes against Iran, citing "discussions" with the Iranian leadership.  He added that a "time and place of the signing" of a negotiated end to the war would "be announced shortly," and the US naval blockade of the Strait of Hormuz "will remain in full force and effect until this transaction is finalized."

Crude prices initially moved higher on Thursday when President Trump said the US would continue bombing Iran if it refuses to agree to an interim peace deal.  Mr. Trump ordered multiple strikes on Iranian targets on Wednesday, and Iran retaliated by firing on US bases in Kuwait, Bahrain, and Jordan.  Crude prices raced to their highs on Thursday after President Trump said the US will be hitting Iran very hard tonight and "at some point" we will be taking Kharg Island, Iran's key export hub, and that the US will assume total control of Iran's oil and gas markets.  Increased hostilities in the Middle East are keeping the Strait of Hormuz closed and are bullish for crude oil prices. 

Crude prices were also pressured on Thursday amid signs of rising oil flows through the Strait of Hormuz and weak Chinese oil demand.  President Trump said the US military had supported the passage of “more than 200 commercial ships” through the Strait of Hormuz, resulting in “more than 100 million barrels of oil” making it to market.  Also, Saudi Aramco is set to sell 12 million bbl of contractual crude oil supplies for July loading to customers in China, below the 13 million to 14 million bbl allocated for June that were already well below historical levels. 

Weakness in Chinese demand is bearish for crude oil prices.  China’s May crude imports fell to about 7.8 million bpd, the lowest in more than eight years.  China is the world’s largest crude importer.

The outlook for higher US crude output is negative for oil prices.  The Department of Energy (DOE) on Tuesday raised its US 2026 crude production estimate to 13.72 million bpd from a May estimate of 13.65 million bpd.

Crude prices have support from the continued Ukrainian drone attacks on Russian oil infrastructure.   Last Monday, 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 data from Bloomberg. US and EU sanctions on Russian oil companies, infrastructure, and tankers have also curbed Russian oil exports.

The International Energy Agency (IEA) said in a monthly report released in May that global 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.

As 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 May crude production fell by -3.36 million bpd to a 40-year low of 16.33 million bpd. 

Vortexa reported on Monday that crude oil stored on tankers that have been stationary for at least 7 days rose +1.2% w/w to 86.59 million bbl in the week ended June 5.

Wednesday’s EIA report showed that (1) US crude oil inventories as of June 5 were -5.3% below the seasonal 5-year average, (2) gasoline inventories were -5.9% below the seasonal 5-year average, and (3) distillate inventories were -13.9% below the 5-year seasonal average.  US crude oil production in the week ending June 5 rose +0.7% w/w to 13.799 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 June 5 rose by +2 to an 11-month high of 431 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.