Crude Oil Prices Surge as US-Iran Conflict Looks to Drag On

September WTI crude oil (CLU26) on Wednesday closed up +5.20 (+6.56%), and September RBOB gasoline (RBU26) closed up +0.0815 (+2.59%).

Crude oil and gasoline prices rallied sharply on Wednesday amid a fresh round of hostilities in the Middle East, which threatens global energy supplies.  Gains in crude accelerated on Wednesday after President Trump said the US will “hit Iran hard” after a recent attack from Iran that targeted a US base in Jordan.  Crude prices raced to their highs after weekly EIA crude inventories unexpectedly fell to a 7.75-year low and after crude supplies at Cushing sank to a nearly 12-year low.

Crude oil prices jumped on Wednesday after the Islamic Revolutionary Guard Corps (IRGC) said it targeted a US airbase and command center in Jordan with ballistic missiles. The IRGC also claimed to have hit and halted three tankers attempting to transit through the Strait of Hormuz. Meanwhile, the US and Saudi Arabia launched a joint attack on "Iran-aligned terrorists" in Iraq after the IRGC directed them to target US forces and Saudi energy infrastructure.

Tensions remain high in the Middle East as the US maintains its blockade of Iranian oil shipments in the Persian Gulf.  Diplomatic attempts to reopen the Strait of Hormuz also appear to be at an impasse. Iranian Deputy Foreign Minister Gharibabadi said Oman's proposal for a route through the Strait of Hormuz, with 50% under Iran's control and 50% under Oman's, would not address Iran's concerns and that the inbound passage and part of the outbound channel must be entirely under Iran's control.

Global crude oil supplies are tightening due to reduced flows through the Strait of Hormuz.  The International Maritime Organization recently warned that it is too dangerous to cross the Strait of Hormuz at the moment, and visible transit through the strait has fallen sharply as Iran continues targeting tankers attempting to transit it.

Crude prices also have support as Ukraine intensifies drone attacks on Russian oil infrastructure.  Russian crude production fell to 8.928 million bpd in June, the lowest in 2.5 years, according to monthly OPEC data.  According to EA Analytics, Russian crude-processing rates will average 3.51 million bpd in July, the lowest in 24 years, amid damage to Russian energy infrastructure caused by drone and missile attacks from Ukraine.  According to Bloomberg, Ukrainian forces have attacked Russian fuel-producing facilities more than 50 times this year, hitting at least 24 of Russia’s 34 largest refineries. As of the end of June, around 90% of Russian regions have imposed some form of fuel rationing or reported supply issues, as refining capacity has plunged following damage to facilities. The strikes have deepened a nationwide gasoline shortage, with several major refineries shut down and the government banning almost all gasoline, jet fuel and diesel exports.  Russia is the world’s number two diesel exporter, after the US, according to Vortexa. 

Stronger Russian crude exports are also adding to global oil supplies, which is bearish for prices. Data compiled by Bloomberg show the four-week average of Russian crude exports remains above 4 million bpd in the period to July 26 and rose to 4.13 million bpd through June 28, the highest since Russia invaded Ukraine in 2022.  Russia may be boosting its crude exports as the country’s refining capacity has plunged due to damage at its refining facilities from Ukraine drone and missile attacks.

As a bearish factor for crude, OPEC delegates said on Tuesday that they expect to pause oil production hikes at its meeting this Sunday, following a final increase of +188,000 bpd in 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 July 5, OPEC+ said it will boost its crude output by 188,000 bpd in August, though that increase might prove difficult amid renewed US-Iran military attacks in the region.  OPEC’s June crude production rose by +2.34 million bpd to 18.75 million bpd. 

Vortexa reported on Monday that crude oil stored on tankers that have been stationary for at least 7 days rose +3.5% w/w to 102.84 million bbl in the week ended July 24.

Wednesday’s weekly EIA report was mixed for crude oil and products.  On the bullish side, EIA crude inventories unexpectedly fell -7.17 million bbl to a 7.75-year low versus expectations of a +1.0 million bbl build. Also, crude supplies at Cushing, the delivery point for WTI futures, fell -771,000 bbl to a nearly 12-year low. On the bearish side, EIA gasoline supplies unexpectedly rose +7,000 bbl versus expectations of a -1.09 million bbl draw.  Also, EIS distillate stockpiles rose +1.06 million bbl, a larger build than expectations of +500,000 bbl.

Wednesday’s EIA report showed that (1) US crude oil inventories as of July 24 were -6.4% below the seasonal 5-year average, (2) gasoline inventories were -6.6% below the seasonal 5-year average, and (3) distillate inventories were -8.5% below the 5-year seasonal average.  US crude oil production in the week ending July 24 was unchanged w/w at 13.796 million bpd, just 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 July 24 fell by -2 to 450 rigs, slightly below the 1.25-year high of 452 rigs posted in the week ended July 17.