Oil Rallies Toward $120 As Middle East Supply Risks Spiral

Oil prices extended their rally on Wednesday after reports emerged that the U.S. will tighten its blockade on Iranian ports, prolonging fears of reduced oil supply from the region, and as the UAE hit markets with its OPEC-exit announcement. Brent crude for June delivery jumped 6.45% to trade at $118.40 per barrel at 2.47 pm ET, while the corresponding WTI crude contract was up 7.20% to change hands at $107.10/bbl. Gasoline prices also continue to edge higher, with AAA reporting the average national price at $4.229 per barrel. The stalemate in the conflict has continued for a further week with no clear resolution on either side, with social media messaging from the White House alternating from apathy to hyperbole on a daily basis. However, oil and commodity analysts at Standard Chartered contend that the U.S. still appears keen to recommence direct negotiations, with every additional day of stalemate representing more lost barrels in the market, inventory drawdowns, and high oil prices–a major point of worry in an election year.

It’s likely that the first stage towards a resolution would be a simultaneous lifting of the US blockade and Iranian restrictions on vessel transit through the Strait of Hormuz. U.S. Secretary of State Marco Rubio said on Tuesday that the Trump administration considers Iran’s current modus operandi of choosing which vessels to permit to transit through the Strait of Hormuz unacceptable. StanChart says allowing free transit would be a clear trust-building step that might allow more complex negotiations about Iran's nuclear capabilities to follow. Such a move would help ease oil prices to $90-95/bbl in the near term, even though logistical lags, shut-in production and the intangible scarring effect of the uncertainty of transit over the past two months are likely to prevent a rapid normalization of physical supplies.

Meanwhile, StanChart has pointed out that the latest move by OPEC+ to defer the decision to allow all producers to add as much supply to the market as possible by another month was likely a major source of frustration for the UAE, triggering its latest announcement that it will be leaving OPEC in May.

Although not one of the five founder members of the group, the UAE joined the group in 1967, and its pre-conflict production represented roughly 13% of total OPEC supply and 9% of OPEC+ output. The experts note that OPEC’s spare-capacity cushion was primarily supported by Saudi Arabia and the UAE, implying that its exit reduces this even further.

The UAE has been accelerating its crude oil production capacity with a target to produce 5 million barrels per day (bpd) by 2027, and its exit from OPEC+ will allow it to prioritize national economic interests and enhance its flexibility to rapidly respond to changing market conditions. ADNOC aims to produce lower-cost, lower carbon-intensive barrels, improving energy efficiency. The UAE can utilize the Abu Dhabi Crude Oil Pipeline to bypass the Strait of Hormuz, maintaining supply stability during regional volatility.

Over the long-term, Brent crude remains in strong backwardation along the forward curve, with the back stable at $68-70 per barrel. StanChart has predicted that prices will remain $10-20/bbl higher than pre-conflict levels even after the war in Iran comes to an end, supported by purchasing for strategic reserves, a focus on resource nationalism and hoarding, and the logistical lags caused by the disruption.

On the natural gas front, European natural gas futures rebounded on Wednesday toward €47.4 per MWh (approximately $51.30 per MWh) after days of decline, driven by intensified geopolitical risks in the Middle East. The surge followed reports that U.S. President Donald Trump has instructed aides to prepare a prolonged blockade of Iranian ports and to choke off its oil exports, rejecting a recent three-step Iranian proposal to unblock the Strait of Hormuz. Weekend talks in Islamabad failed to produce a deal, maintaining the pressure on energy supplies and reversing earlier downward trends in natural gas prices. Europe's Liquefied Natural Gas (LNG) imports are experiencing significant volatility and structural shifts due to the war with Iran, characterized by surging prices, increased competition with Asian buyers, and a surprising reliance on Russian supplies. The conflict has halted some shipments from Qatar, which account for about 8% of EU LNG imports.

The Middle East war, on the other hand, has helped the United States to solidify its position as the largest supplier of LNG to the EU, accounting for approximately two-thirds of imports. Other suppliers, including Algeria and Norway, are also helping to fill the gap.

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