Crude Oil Prices Fall on the Outlook for a US-Iran Truce

May WTI crude oil (CLK26) today is down -3.26 (-3.53%), and May RBOB gasoline (RBK26) is down -0.1412 (-4.56%).  Crude oil and gasoline prices are sharply lower today in hopes that US-Iran diplomacy can end the war in Iran.   Also, the unexpected increase in weekly EIA crude inventories to a 1.75-year high is bearish for crude prices.  However, crude recovered from its worst level after Iran dismissed the US peace plan in its current form.  

Crude prices sank today after the US sent a 15-point peace proposal to Iran that covers a rollback of Iran’s nuclear program, including the resumption of monitoring by the International Atomic Energy Agency, limits on missiles, and access for shipping through the Strait of Hormuz.  In return, Iran would get relief from economic sanctions.

However, crude prices recovered from their worst levels after Iran’s semi-official news agency Fars said Iran rejects the US ceasefire proposal and that a truce and peace talks are not viable in current conditions.  Iran wants a complete halt to “aggression and assassinations” by the enemy and the establishment of concrete mechanisms to ensure that the war is not reimposed on Iran.  Also, Iran wants guaranteed, clearly defined payment for war damages and reparations, and international recognition and guarantees of Iran’s sovereign right to exercise authority over the Strait of Hormuz.  

Concerns that the Iran war could widen throughout the Middle East are also underpinning crude prices.  Saudi Arabia agreed to give the US military access to King Fahd Air Base, and the UAE closed an Iranian-owned hospital and club.  Iran’s Middle Eastern neighbors are growing frustrated with Iran, which has responded to US and Israeli attacks by hitting targets in several nearby nations.

Energy prices remain supported after Qatar said last Thursday that there was “extensive damage” at the world’s largest natural gas export plant at Ras Laffan Industrial City.  Qatar said that Iran’s strikes damaged 17% of Ras Laffan’s LNG export capacity, a damage that will take three to five years to repair.   The International Energy Agency said Monday that more than 40 energy sites across nine countries in the Middle East have been “severely or very severely” damaged, potentially prolonging disruptions to global supply chains once the war in Iran ends.

The Strait of Hormuz remains essentially closed, and Persian Gulf oil producers have been forced to cut production by roughly 6% as local storage facilities reach capacity.  The Strait of Hormuz normally handles a fifth of the world’s oil.  Goldman Sachs warns that crude prices could exceed the 2008 record high of close to $150 a barrel if flows through the Strait of Hormuz remain depressed through March.

In a bearish factor for crude, OPEC+ on March 1 said it will boost its crude output by 206,000 bpd in April, above estimates of 137,000 bpd, although that production hike now seems unlikely given that Middle East producers are being forced to cut production due to the Middle East war.  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 February crude production rose by +640,000 bpd to a 3.25-year high of 29.52 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 40% 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 fell by -5.5% w/w to 86.55 million bbl in the week ended March 20, the lowest in 4 months.

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.

Today’s weekly EIA report was mixed for crude oil and products.  On the negative side, EIA crude inventories unexpectedly rose by +6.93 million bbl to a 1.75-year high versus expectations of a -1.25 million bbl draw.  Also, EIA distiller supplies unexpectedly rose +3.03 million bbl versus expectations of a -1.95 million bl draw.  In addition, crude stockpiles at Cushing, the delivery point for WTI futures, surged by +3.42 million bbl to a 20-month high.  On the positive side, EIA gasoline inventories fell by -2.59 million bbl, a larger draw than expectations of -2.0 million bbl.

Today’s EIA report showed that (1) US crude oil inventories as of March 20 were +0.6% above the seasonal 5-year average, (2) gasoline inventories were +3.3% above the seasonal 5-year average, and (3) distillate inventories were -0.6% below the 5-year seasonal average.  US crude oil production in the week ending March 20 was down -0.1% at 13.657 million bpd, mildly below the record high of 13.862 million bpd posted in the week of November 7.

Baker Hughes reported Friday that the number of active US oil rigs in the week ended March 20 rose by +2 to 414 rigs, modestly 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.