The oil market has continued to rally as the ceasefire between the US and Iran appears to be on life support. ICE Brent settled 5.2% higher yesterday at a little over $78/bbl, with further upside expected today following additional US strikes against Iran in response to its earlier attacks on several vessels navigating the Strait of Hormuz. President Trump said he considers the ceasefire with Iran to be over, while also threatening to reimpose a blockade on Iranian ports. This would be more impactful for oil markets than the recent revocation of a sanction waiver on Iranian oil. Iran has vowed to respond to these recent strikes, with reports that US military bases in the region will be targeted. Key for the oil outlook is whether the US and Iran are able to quickly de-escalate this latest rise in tensions.
The past few days’ price action makes one thing clear: markets were far too relaxed about the risks surrounding the deal — and far too bullish on how quickly regional supply could rebound. Vessel tracking data shows that Strait of Hormuz tanker crossings declined to just 7 yesterday, the lowest level since 21 June. This compares to a daily average of 18 over the first seven days of July. This data will not pick up tankers navigating the strait with their transponders turned off. The market will be watching whether these crossings rebound in the coming days — or whether rising tensions keep shipowners wary of navigating this critical energy choke point.
Adding to supply concerns in the oil market, and specifically in middle distillates, Russia announced a ban on the export of diesel until the end of July. This comes amid fuel shortages in the country following continued Ukrainian drone attacks on Russian refinery infrastructure. There has been plenty of noise in recent weeks that Russia was considering a ban, so this shouldn’t come as too much of a surprise. However, the front-month ICE gasoil contract still surged almost 13% yesterday, while the crack is now trading above $60/bbl. Russia is the globe’s second largest diesel exporter. So, this move is significant for the market, although Russian diesel exports have come under significant pressure already due to the Ukrainian attacks.
The latest EIA data shows that US commercial crude oil inventories increased by 2.99m barrels over the last week. It’s the first weekly increase in crude inventories since April. However, when taking into consideration SPR releases, total crude oil inventories fell by 3.17m barrels. There was more tightness in the refined product markets, with gasoline and distillate stocks falling by 1.9m barrels and 4.98m barrels, respectively. Stronger distillate exports helped pull inventories lower — and with Russia’s diesel ban in place, demand for US barrels is set to rise even further.