Crude Prices Settle Higher as Middle East Supplies Tighten

September WTI crude oil (CLU26) closed up +1.07 (+1.30%) on Tuesday, and September RBOB gasoline (RBU26) closed up +0.0012 (+0.04%).

Crude oil and gasoline prices settled higher on Tuesday, with crude oil climbing to a 1-week high and gasoline posting a 1.5-week high.  Crude prices were volatile on Tuesday, whipsawing lower and higher on news headlines.  The lack of an agreement between Iran and Oman to reopen the Strait of Hormuz is limiting crude supplies from the Middle East and is underpinning oil prices.  Crude prices regained upward momentum Tuesday afternoon when Iran's state-owned Islamic Republic of Iran Broadcasting (IRIB) said the Strait of Hormuz would remain shut until all of its conditions are met.

However, gains in crude were limited after Pakistan signaled the US and Iran were close to an arrangement that could reopen the Strait of Hormuz.  Al Jazeera said that talks between Oman and Iran to reopen the Strait of Hormuz have reached an advanced stage.  Pakistani defense minister Khawaja Asif said today that signals in the "last two to three days are that we are close to some sort of agreement."

Crude prices on Tuesday added to Monday’s sharp gains after President Trump late Monday hardened his stance toward Iran, making it unlikely there will soon be a deal to reopen the Strait of Hormuz.  In response to Iran’s demand for compensation for war damages, President Trump said he will “demand compensation from Iran for people killed and wounded with roadside bombs and many conflicts to people in Lebanon, Syria, Yemen and Gaza over the last 50 years.” 

The risk of a renewed flare-up across the Middle East remains high, as another UAE tanker was targeted by a missile on Saturday while transiting the Strait of Hormuz.  Also, on Sunday, Houthi militants in Yemen claimed an attack on Saudi Arabia's Jazan refinery.  The Houthis said they will escalate attacks on Saudi oil tankers in the northern Red Sea to prevent them from transiting the area. 

Traffic through the Strait of Hormuz remains slow, tightening global crude supplies and boosting oil prices.  Energy Aspects said on Monday that only an average of five vessels are transiting through the strait, far below the 14 ships a day seen after the US and Iran reached a memorandum of understanding in June.

Crude prices also have support as Ukraine intensifies drone attacks on Russian oil infrastructure.  Ukraine has attacked Russian refineries, oil tankers, and major pipeline infrastructure at least 30 times in July, the second-highest monthly number of attacks since the war began in 2022.  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.  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. 

Robust crude supplies in China may reduce Chinese crude purchases in the near term, a bearish factor for oil prices.  China's crude inventories remain abundant, with supplies falling by only 54 million bbl since early May to around 1.2 billion bbl, according to data from Kpler.

Stronger Russian crude exports are also adding to global oil supplies, which is bearish for prices.  Russia may be boosting its crude exports as the country's refining capacity has plunged due to damage at its refining facilities from Ukraine's drone and missile attacks.

As a bearish factor for crude, OPEC delegates on August 2 approved their final increase of +188,000 bpd in crude production for September.  The group has now restored all of the 1.65 million bpd supply cutback it made back in 2023 and said it plans to hold output steady for the rest of the year after the September hike.  The production increases by OPEC+ might prove difficult to achieve amid renewed US-Iran military attacks in the region.  OPEC's July crude production rose by +1.16 million bpd to 19.44 million bpd. 

Vortexa reported on Monday that crude oil stored on tankers that have been stationary for at least 7 days fell -0.7% w/w to 119.28 million bbl in the week ended August 7.

The consensus is that Wednesday’s weekly EIA crude inventories fell by -1.5 million bbl, and gasoline supplies fell by -1.15 million bbl.

Last Wednesday's EIA report showed that (1) US crude oil inventories as of July 31 were -6.2% below the seasonal 5-year average, (2) gasoline inventories were -6.2% below the seasonal 5-year average, and (3) distillate inventories were -11.7% below the 5-year seasonal average.  US crude oil production in the week ending July 31 rose +0.1% w/w at 13.804 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 August 7 rose by +3 to a 14-month high of 454 rigs.