Crude Prices Surge on Dimming US-Iran Peace Prospects

December WTI crude oil (CLZ26) closed up +2.21 (+2.55%) on Thursday, and December RBOB gasoline (RBZ26) closed up +0.0633 (+2.43%).

Crude oil and gasoline prices erased overnight losses and moved sharply higher Thursday on comments from President Trump, who said the US doesn’t need a deal with Iran, a marked shift from his previous comments to pursue a diplomatic resolution and potentially keeping the war unresolved and Middle Eastern energy supplies disrupted. Crude prices rose Thursday despite a rally in the dollar index ($DXY) to a 1.5-year high and a bearish EIA inventory report. 

Crude prices were initially under pressure on Thursday as Middle East oil production increased, even as tensions between Iran and the US continue to threaten shipments through the Strait of Hormuz.  Saudi Arabia’s crude output soared 26% in October, and Iraq boosted its crude production to a new wartime high.  Also, diplomatic efforts continue in an attempt to end the US-Iran conflict, although the US and Iran still disagree on key issues such as Iran’s nuclear program, frozen assets, and the US Naval blockade. 

Iran continues to assault ships going through the Strait of Hormuz, and the US has launched limited strikes on Iran's Qeshm Island since early last week.  Also, risks to Middle Eastern energy infrastructure persist after Saudi Arabia's East-West pipeline was targeted Monday in the Medina region, and western Saudi Arabia was targeted by missiles on Wednesday by Houthi Rebels. 

Hopes for a breakthrough in negotiations to end the US war in Iran have increased after last week’s Democratic sweep of US midterm elections, adding pressure to the Trump administration to seek an off-ramp to the war.  Qatar's Foreign Ministry said Tuesday there have been "positive responses" from the US and Iran to ongoing mediation efforts.

Despite the ongoing US-Iran conflict, oil supplies are still leaving the Middle East.  Combined exports from Saudi Arabia, the United Arab Emirates, Iraq, and Kuwait climbed 10% to 15.53 million bpd in October, roughly in line with levels shipped at the start of the year, according to tanker-tracking data compiled by Bloomberg.

Higher Saudi crude output is bearish for crude prices.  Saudi Arabia said its Oct crude production rose by +970,000 bpd to 9.2 million bpd (+12% m/m), recovering further from a 36-year low in August.  However, Saudi oil production continues to be threatened by Houthi missile attacks on Saudi Arabia and by the Houthi threats to oil shipments near the Bab-al-Mandeb Strait.

On the positive side for crude, Saudi Arabian state producer Aramco last Thursday cut its crude prices for Asian buyers next month by less than expected.  Aramco cut its crude price for Asian buyers for December delivery by $2 a barrel, less than market expectations of a $5 decrease from November.

Recent attacks by Ukraine on Russian oil infrastructure have curbed Russian crude production and exports. Ukraine has attacked six of Russia’s ten largest oil-processing plants in recent months.  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 November 1, OPEC+ agreed to keep oil production quotas unchanged for December.  As a bearish factor for crude, OPEC delegates on August 2 approved their final increase of +188,000 bpd in crude production for September. On paper, the group has 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, OPEC+ may struggle to deliver planned production increases amid Middle East shipping disruptions.  OPEC's Oct crude production rose by +930,000 bpd to an 8-month high of 22.8 million bpd. 

Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least 7 days fell -7.7% w/w to 88.32 million bbl in the week ended November 6, the lowest level in more than 3 months.

Thursday’s weekly EIA report was bearish for crude oil and products.  EIA crude inventories unexpectedly rose +4.66 million bbl versus expectations of a -1.48 million bbl draw.  Also, EIA gasoline supplies unexpectedly rose +1.8 million bbl versus expectations of a -350,000 bbl draw.  In addition, EIA distillate stockpiles unexpectedly rose +4.07 million bbl versus expectations of a -2.0 million bbl draw.  Finally, US crude production rose to a record 14.013 million bpd in the week ended November 6, and crude supplies at Cushing, the delivery point of WTI futures, rose +106,000 bbl.

Thursday’s EIA report showed that (1) US crude oil inventories as of November 6 were -4.4% below the seasonal 5-year average, (2) gasoline inventories were +0.5% above the seasonal 5-year average, and (3) distillate inventories were -8.4% below the 5-year seasonal average.  US crude oil production in the week ending November 6 rose +0.1% w/w to a new record high of 14.013 bpd.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ended November 6 rose by +1 rig to a 1.5-year high of 463 rigs.

On the date of publication, Rich Asplund did not directly have a position 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.