Crude Oil Sharply Higher on War in Iran

April WTI crude oil (CLJ26) on Monday closed up +4.21 (+6.28%), and April RBOB gasoline (RBJ26) closed up +0.0851 (+3.72%).

Crude oil and gasoline prices rallied sharply on Monday, with crude posting an 8.25-month high and gasoline posting a 19-month high.  The main bullish factor for crude prices is the war in Iran after the US and Israel launched joint attacks on the country.  Crude prices fell from their best levels on Monday after the dollar index ($DXY) rallied to a 5-week high and after OPEC+ raised its crude production levels.

Crude prices surged on Monday after the US and Israel attacked Iran.  President Trump said that combat operations could last for weeks until all objectives were completed.  Tanker traffic through the Strait of Hormuz, which runs along Iran's coast and handles a fifth of the world's oil, has largely halted after Iran attacked three oil tankers.  Iran pumps about 3.3 million bpd, or about 3% of global output, but has strategic importance due to its location along the Strait of Hormuz.  Goldman Sachs estimates the real-time risk premium for crude oil at $18/bbl, corresponding to its estimate of the impact of a six-week full halt to tanker traffic in the Strait of Hormuz.

Crude prices also rose on Monday after Iran launched drone attacks against several Gulf states in retaliation for the US-Israel attacks, forcing Saudi Arabia to shut down its Ras Taura refinery, the country's largest, which refines 550,000 bpd of crude oil.

In a bearish factor for crude, OPEC+ on Sunday said it will boost its crude output by 206,000 bpd in April, above estimates of 137,000 bpd.  OPEC+ is trying to restore all of the 2.2 million bpd production cut it made in early 2024, but still has nearly another 1.0 million bpd left to restore.  OPEC's January crude production fell by -230,000 bpd to a 5-month low of 28.83 million bpd.

Mounting crude supplies in floating storage are a bearish factor for oil prices.  According to Vortexa data, about 290 million bbl of Russian and Iranian crude are currently in floating storage on tankers, more than 50% higher than a year ago, due to blockades and sanctions on Russian and Iranian crude.  Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least 7 days rose by +20% w/w to 105.48 million bbl in the week ended February 27.

An increase in crude exports from Venezuela is also boosting global oil supplies and is bearish for prices.  Reuters reported on February 9 that Venezuelan crude exports rose to 800,000 bpd in January from 498,000 bpd in December.

On February 10, the EIA raised its 2026 US crude production estimate to 13.60 million bpd from 13.59 million bpd last month, and raised its US 2026 energy consumption estimate to 96.00 (quadrillion btu) from 95.37 last month.  The IEA last month cut its 2026 global crude surplus estimate to 3.7 million bpd from last month's estimate of 3.815 million bpd.  

The most recent US-brokered meeting in Geneva to end the war between Russia and Ukraine ended early as Ukrainian President Zelenskiy accused Russia of dragging out the war.  Russia has said the "territorial issue" remains unresolved with Ukraine, and there's "no hope of achieving a long-term settlement" to the war until Russia's demand for territory in Ukraine is accepted.  The outlook for the Russia-Ukraine war to continue will keep restrictions on Russian crude in place and is bullish for oil prices.

Ukrainian drone and missile attacks have targeted at least 28 Russian refineries over the past seven months, limiting Russia's crude oil export capabilities and reducing global oil supplies.  Also, since the end of November, Ukraine has ramped up attacks on Russian tankers, with at least six tankers attacked by drones and missiles in the Baltic Sea.  In addition, new US and EU sanctions on Russian oil companies, infrastructure, and tankers have curbed Russian oil exports.

Last Wednesday's EIA report showed that (1) US crude oil inventories as of February 20 were -2.5% below the seasonal 5-year average, (2) gasoline inventories were +3.2% above the seasonal 5-year average, and (3) distillate inventories were -5.3% below the 5-year seasonal average.  US crude oil production in the week ending February 20 fell -0.2% w/w to 13.702 million bpd, just below the record high of 13.862 million bpd from the week of November 7.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ended February 27 fell by -2 to 409 rigs, just 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.