Crude Prices Surge on Escalation of US-Iran Hostilities

October WTI crude oil (CLV26) closed up +4.46 (+5.20%) on Tuesday, and October RBOB gasoline (RBV26) closed up +0.0581 (+1.89%).

Crude oil and gasoline prices surged on Tuesday, with crude oil posting a 6-week high.  Crude prices rallied sharply on escalation of hostilities between the US and Iran, raising concerns about prolonged disruptions to energy flows through the Strait of Hormuz.

Crude oil prices soared on Tuesday after two oil supertankers were struck by projectiles late Monday while attempting to exit the Strait of Hormuz.  The attacks came after the US on Sunday targeted Iranian rocket launchers preparing to send mines into the Strait of Hormuz, and after Iran retaliated by firing missiles and drones at US air bases in Jordan and the United Arab Emirates. 

Crude prices raced to their highs Tuesday afternoon when the US launched a fresh wave of strikes against targets in Iran in retaliation for Iran trying to put mines in the Strait of Hormuz and for earlier strikes on a US military base in Jordan.  Iran threatened "severe punishment" and said it will target US bases and interests in the Middle East in retaliation. 

President Trump recently said that the US naval blockade on Iranian ports is putting pressure on the country, and he has no timeline for resolving the US-Iran conflict. 

Crude prices also have support amid fresh Israeli attacks on Iran-backed Hezbollah in Lebanon, dampening the prospects of ending hostilities in the Middle East and a quick reopening of the Strait of Hormuz.  In addition, Israel has struck Iran-backed Hamas in Gaza, the Yemen- based Houthis have attacked ships in the Red Sea, and several vessels have been hit by projectiles in the Strait of Hormuz.

In a supporting factor, the International Energy Agency (IEA) said in its monthly report, released on August 12, that the global oil supply deficit will worsen, even as oil demand is taking a hit from the war and high prices.  The IEA said global oil inventories will fall in Q3 at twice the previously estimated rate because of ongoing disruptions from the US-Iran war.

Crude also has support on concerns that Russian crude production could be disrupted further after a Bloomberg News report last Wednesday said that Russia is preparing to escalate attacks on Ukraine after concluding that negotiations for a peace deal have reached a dead end. 

Ukraine has intensified drone attacks on Russian oil infrastructure, curbing Russian crude production and exports.  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 averaged 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.  The attacks on Russian oil infrastructure knocked Russia’s crude production in July to 8.89 million bpd, the lowest in six years, according to secondary source estimates published by OPEC.  Meanwhile, Reuters reported last Friday that Russia’s gasoline production fell to about 80,000 tons a day in August, only 70% of domestic demand, leading to shortages throughout the country.

On the bearish side of crude are signs of larger oil supplies leaving the Middle East.  Last Friday, Goldman Sachs said oil exports from the Persian Gulf have risen to 15 million to 16 million bpd, about two-thirds of pre-war levels. 

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 rose +7.1% w/w to 107.58 million bbl in the week ended August 28.

The consensus is that Wednesday’s weekly EIA crude inventories rose by +60,000 bbl, and gasoline supplies fell by -1.6 million bbl.

Last Wednesday's EIA report showed that (1) US crude oil inventories as of Aug 21 were +1.3% above the seasonal 5-year average, (2) gasoline inventories were -5.9% below the seasonal 5-year average, and (3) distillate inventories were -14.6% below the 5-year seasonal average.  US crude oil production in the week ending Aug 21 rose +0.1% w/w to 13.843 million bpd, just below the record high of 13.862 million bpd posted in November 2025.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ended August 28 fell by -5 to 447 rigs, modestly below the 1.25-year high of 455 rigs from the week of August 14.