Crude Prices Finish Sharply Higher on Middle East Tensions

November WTI crude oil (CLX26) closed up +3.21 (+3.64%) on Thursday, and November RBOB gasoline (RBX26) closed up +0.818 (+2.53%).

Crude oil and gasoline prices settled sharply higher on Thursday on signs of possible escalation of the US-Iran conflict.  Surging freight costs to ship crude oil out of the Middle East to a record high are also underpinning crude prices.  In addition, crude oil has support as US crude producers shut in more than 1.28 million bpd of crude output, or 63% of Gulf output, in response to Hurricane Isaias forming in the US Gulf. 

However, crude prices fell from their high Thursday afternoon after President Trump said the US would not attack Iran ahead of next month’s midterm elections, citing “productive discussions” with Iran.

Crude oil prices surged on Thursday on signs of possible escalation of the US-Iran conflict after a report from the Atlantic said the White House asked the Pentagon to draw up strike options against Iran that could be executed before the midterm elections.

Crude oil also has support amid surging freight costs to ship crude out of the Middle East due to Iranian attacks on ships in the Strait of Hormuz.  The cost to ship oil from the Middle East to China jumped to $1.4 million a day, the most on record. 

Crude has support on concerns that oil supplies from the Middle East could be disrupted after Iran ramped up attacks on tankers attempting to transit the Strait of Hormuz. The UK’s Maritime Trade Operations reported on Tuesday that the pace of attacks by Iran has increased in recent days, with nine vessels targeted over the last several days. 

On Tuesday, crude prices dropped to a 1-month low on signs that more crude supplies are leaving the Middle East, easing global supply concerns.  Shell Plc said oil flows out of Hormuz have increased to about 80% of prewar levels.

Another bearish factor for crude was Monday’s action by Saudi Aramco to cut the price of its Arab Light crude to Asian buyers by $5 a barrel below a regional benchmark for November delivery, a wider cut than expectations of a $5 a barrel increase.  Also, Saudi Arabia said crude supplies through its East-West pipeline had risen to 80% of capacity as of Saturday.

The advances by the Houthi rebels to take territory along the Red Sea in Yemen are also contributing to concerns about tighter oil supplies from the Middle East.  Last month, the Houthis captured a pair of islands near the Bab-al-Mandeb Strait.  That followed their seizure of Perim Island and the Red Sea port city of Mokha at the southern end of the Red Sea, putting the group in a stronger position to attack ships.  Since the closure of the Strait of Hormuz, Saudi Arabia has pivoted to the Red Sea to export most of its oil over the past two months.  However, escalating tensions with the Houthis have disrupted that route. 

Crude oil prices have support from a Wall Street Journal report last Thursday that said the US is sending a third aircraft carrier strike group and an additional 10,000 troops to the Middle East and that President Trump told aides he expects to resume bombing Iran by the end of November.

On the bearish side for crude, JPMorgan Chase said last Wednesday that Middle East crude exports have rebounded to 17.5 million bpd, or about 98% of pre-war levels, although flows of gasoline, diesel and distillates were at 3 million bpd, or 58% of pre-war levels.

Signs of larger oil exports from Saudi Arabia are bearish for prices.  Tracking data compiled by Bloomberg show Saudi Arabia's crude exports stood at 5.28 million bpd in September, the highest in seven months.  Saudi Arabia also said it restored about 3.5 million bpd of the East-West Pipeline's 7 million bpd capacity on Monday after repairs restored the link damaged by drone strikes earlier this month.  However, Saudi Arabia said that its crude production in August fell to 6.238 million bpd, the lowest since 1990. 

The US and Iran remain at odds over key issues, including control over the Strait of Hormuz. Iranian President Pezeshkian recently said that Iran won’t allow freedom of navigation through the Strait of Hormuz while sanctions and a US blockade remain in place.

Vitol Group said that global oil markets are continuing to tighten, with the loss of about 2 million bpd from crude exports in the Middle East, and a further 2 million bpd from Russia because of Ukraine’s drone attacks.  Data compiled by Bloomberg, Kpler and Vortexa showed that Saudi Arabia's Aug crude exports dropped to about 3 million bpd, the lowest amount in 9 years.

Ukraine has intensified drone attacks on Russian oil infrastructure, curbing Russian crude production and exports.  Ukraine attacked Russian fuel-producing plants 15 times in September and 22 times in August, targeting five of Russia’s ten largest oil-processing plants.  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. Russian crude processing rates recovered slightly to 3.98 million bpd in September as damaged refineries struggle to come back online.

On the bearish side for crude, the International Energy Agency (IEA) on September 11 warned that high oil prices and restricted oil supply will cause the biggest drop in global oil demand this year since the Covid-19 pandemic.  Despite the projected demand drop, the IEA raised its estimate for this year’s global oil deficit to 1.7 million bpd from last month’s 1.3 million bpd estimate due to the restricted supply caused by the US-Iran war. The IEA said the return of a global oil surplus will be delayed until 2027, later than its previous estimate of late 2026.

On Sunday, OPEC+ agreed to keep oil production quotas unchanged for November.  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 1.65 million bpd of the supply cutback it made in 2023 and said it plans to hold output steady for the rest of the year after the September hike.  However, the planned OPEC+ production increases may be difficult to achieve amid persistent US-Iran military attacks in the region.  OPEC's Aug crude production fell by -900,000 bpd to 19.91 million bpd. 

Vortexa reported on Monday that crude oil stored on tankers that have been stationary for at least 7 days rose +2.6% w/w to 97.00 million bbl in the week ended October 2.

Wednesday's EIA report showed that (1) US crude oil inventories as of October 2 were -0.3% below the seasonal 5-year average, (2) gasoline inventories were -6.4% below the seasonal 5-year average, and (3) distillate inventories were -11.3% below the 5-year seasonal average.  US crude oil production in the week ending October 2 rose +0.2% w/w to a new record high of 13.979 million bpd.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ended October 2 rose by +1 to a 16-month high of 456 rigs.

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. For more information please view the Barchart Disclosure Policy here.