Crude Oil Rallies on Concerns US-Iran War to Persist

May WTI crude oil (CLK26) on Thursday closed up +3.40 (+3.72%), and May RBOB gasoline (RBK26) closed up +0.0945 (+3.08%).

Crude oil and gasoline prices rallied sharply on Thursday as the US naval blockade of the Strait of Hormuz entered its fourth day, curbing oil supplies from the Middle East. Gains in crude oil accelerated on Thursday after Bloomberg reported that some Gulf Arab and European leaders believe that a US-Iran peace deal will take about six months, dashing hopes of a speedy conclusion to the Iran conflict. Also, Thursday's rally in the S&P 500 to a new all-time high shows confidence in the economic outlook, which is supportive of energy demand and crude prices.

Crude prices fell back from their best level Thursday afternoon, after President Trump said the prospects for a peace deal with Iran are "looking very good," as the two sides are in discussions to extend a ceasefire that expires next week. President Trump also announced that Israel and Lebanon had agreed to a 10-day ceasefire, which eases tensions in the Middle East and may also help to end the US-Iran war.

Persian Gulf oil producers have been forced to cut production by roughly 6% due to the closure of the Strait of Hormuz as local storage facilities reach capacity. On Monday, the US began a blockade of all vessels passing through the Strait of Hormuz that call at Iranian ports or are headed there. The blockade could exacerbate global oil and fuel shortages, as about a fifth of the world's oil and liquefied natural gas transits through the strait. Iran has been able to export crude during the war, as it exported about 1.7 million bpd in March.

The International Energy Agency (IEA) said Monday that about 13 million bpd of global oil supply has been shuttered by the Iran war and the closure of the Strait of Hormuz. The IEA also said that more than 80 energy facilities have been damaged during the conflict, and a recovery could take as long as two years.

Crude prices also have support after Saudi Arabia's state producer, Saudi Aramco, raised the price of its main oil grade to Asia last week by $17 a barrel for May delivery, the biggest jump on record.

In a bearish factor for crude, OPEC+ on April 5 said it will boost its crude output by 206,000 bpd in May, 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 another 827,000 bpd left to restore. OPEC's March crude production fell by -7.56 million bpd to a 35-year low of 22.05 million bpd.

Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least 7 days fell -35% w/w to 89.13 million bbl in the week ended April 10, a 5-month low.

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 eight 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.

Wednesday's EIA report showed that (1) US crude oil inventories as of April 10 were +1.9% above the seasonal 5-year average, (2) gasoline inventories were +1.1% above the seasonal 5-year average, and (3) distillate inventories were -5.2% below the 5-year seasonal average. US crude oil production in the week ending April 10 was unchanged w/w at 13.596 million bpd, mildly 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 April 10 was unchanged at 411 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.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com