The Sky’s the Limit for Crude Prices

Oil – Fundamental Analysis

There aren’t enough superlatives to describe this week’s price action for crude oil after last weekend’s initial attack on Iran. Last Friday’s High for WTI pushed the $68/bl. level which supposedly included a $3-$5 per barrel “risk premium” should the US attack Iran. The general sentiment was that any attack could potentially take Iran’s 3.0 million bld. of production off the market. And there was some concern about the Strait of Hormuz. However, when the market opened last Sunday evening, prices immediately traded $75/bl. on the Open, a $7/bl. jump from Friday’s High, indicating a risk premium more like $10 – $12/bl. as the market hadn’t considered Iran attacking its neighboring, oil-producing states. Oil prices have been running higher since while seeking a top. WTI’s High thus far has been Friday’s $92.60/bl., a +$25 rise since last Friday, while the Low was Monday’s $69.20. Friday’s Hi/Lo range alone was over $14/bl. The US grade has not traded that high since September 2023 when OPEC+ announced their new output cuts. Brent hit $94.65/bl. Friday with a Low of $75.75 also on Monday. Both grades are substantially higher than last week, and the spread has tightened to ($2.20), the narrowest in years as WTI’s value increased as a result of the closure of the Strait of Hormuz. All other events took a back seat to the war this week. Even the Weekly Petroleum Status Report’s +3.5 million bl. inventory gain was a non-event.

During a press “gaggle” last Friday, President Trump expressed disappointment with the lack of progress in the US talks with Iran but said he would “give them some more time”. The next day, the US & Israel attacked Iran which, in turn unleased on neighboring “petro-states” seen as being friendly to the US. The Strait of Hormuz has been effectively blocked due to threats made by the IRGC. This has backed-up oil and LNG tankers upstream of the Strait in some cases leading to the halt of oil and LNG production given the lack of takeaway and declining storage capacity.

As the markets look for relief from the bottleneck which is halting about 20 million bld., all avenues are being addressed. The Joint Maritime Information Center (JMIC) has reported that only (2) commercial ships have passed through the Strait in the last (24) hours and those were carrying cargo. The US has now pledged US Navy escorts for ships wishing to traverse the Strait while also providing marine insurance (JP Morgan indicated that the Development Finance Corporation doesn’t have enough funding to cover all the ships that are backlogged). OPEC+ last Sunday indicated they could provide about 250k bld. more in output while Saudi Arabia works to divert shipments via pipeline to its Red Sea ports. Venezuela has been increasing its exports also, but there are still not enough solutions in total to offset the volumes laying idle in the Strait let alone future exports.

The US has granted India temporary permission to resume buying crude from Russia since they have been impacted by cutting off Urals as demanded by the US. Other Asian countries such as China, Japan and South Korea are being hurt as well. China, for its own part, has contacted Iran requesting they allow oil and LNG coming from Qatar to pass the Strait. China, however, has been stockpiling crude reserves for the past year and has continued the practice into 2026.

In the US, shale producers can’t really ramp up much in the near-term. However, there are about 1,400 oil wells which have been drilled but not yet completed. The current prices could provide the incentive to complete these in the next few months provided there are enough completion crews available.  And the Trump Administration has thus far chosen not to draw from the Strategic Petroleum Reserve. Deliverability from the SPR would be limited to about 1.0 million bld.

The Energy Information Administration’s Weekly Petroleum Status Report indicated that commercial crude oil inventories for last week increased +3.5 million bl. to a total of 439 bl. million and -3% below the 5-year average. The API forecasted -5.6 million bl. while market analyst foresaw a gain of +1.6 million bl. US refinery utilization was 89.2% up from 98.6% last week representing +18k bld. to 15.8 million bld. Gasoline demand was -440k bld. to 8.3 million bld. Total motor gasoline stocks decreased

-1.7 million bl. to 253 million bl. and are now +4% above the 5-year average. Distillates were +0.43 million bl. at 120.8 million bl. and are now at -3% below the 5-year average. Inventory at the key Cushing, OK hub changed +1.6 million Bbl. to 26.5 million Bbl. or 31% of capacity. The SPR held at 415 million bbl. Imports of crude oil were -400k bpd. to 6.3 million Bbld. vs. 6.7 the prior week while exports were 4.0 million bpd. vs. 4.3 the prior week. Exports of petroleum products were 7.0 million bpd. last week vs. 6.6 the prior week. Total US oil production was 13.7 million bld. last week vs. 13.5 last year at this time. Total US active rigs were +1 to 551 vs. 592 last year with +4 oil, -2 in gas and -1 misc.

AAA’s average US retail gasoline prices continue to rise at the pump due to the war and were most recently reported at $3.32/gal., +$0.34/gal. vs. last week, +$0.42gal. from last month and +$0.21/gal. more than a year ago.

The US lost 92k jobs in February as the mass layoffs announced in January started to take effect and after a better report that month. WSJ analysts had forecasted a gain of +50k positions which would have been a paltry amount anyhow. Unemployment moved higher to 4.4%. The US has experienced negative hiring numbers in 3 out of the last 6 months. The Institute for Supply Management (ISM) reported good news for the manufacturing sector last months as business activity grew from 57.4 to 59.9, services went from 53.8 to 56.1 and new orders increased to 58.6 from 53.1. All (3) major US stock markets are lower on the week due to the war. The USD is down as well, which is supportive of oil prices. Gold remains well above the $5,000/oz. mark.