Happy Friday!
Oil is ending the week right around $77 a barrel. This was the week the world actually saw a peace deal get signed, watched the first supertankers move through the Strait of Hormuz in months, and celebrated gasoline dropping below $4 a gallon for the first time since March. And then Friday morning brought a fresh complication that reminded everyone how fragile this whole thing still is.
The week started Monday with oil already down sharply after Trump announced over the weekend that the U.S. and Iran had agreed to an interim peace deal. Pakistan’s prime minister confirmed that both sides would sign a formal memorandum of understanding in Switzerland on Friday. The terms were significant: the Strait of Hormuz would reopen toll-free, the U.S. naval blockade of Iranian ports would end, and Iran would get the right to resume oil exports immediately. The E4 nations said they were prepared to lift sanctions on Iran in exchange for steps toward nuclear disarmament. Iran agreed in principle to not produce or acquire nuclear weapons and to dramatically reduce its enriched uranium stockpile.
The market priced all of this in with cautious optimism rather than outright celebration, and I think that was the right call. Oil traders have watched Trump announce imminent deals on the Strait many times since February only to see fighting resume. The full text of the agreement still had not been released Monday, and major shippers said they would not restart Hormuz transit until the waterway was confirmed safe, including mine clearance.
What most people did not know until Tuesday was that the U.S. military had been quietly running a covert ship-to-ship oil transfer operation since early May to keep Gulf energy moving during the war. At least 92 ships were involved with handoff points near Fujairah in the UAE and Oman’s port of Sohar. Here is what I find remarkable about that. This is the exact same technique Iran has used for years to evade U.S. sanctions. Washington borrowed Iran’s own playbook to keep oil flowing during the war with Iran. Oil fell further on Tuesday, extending the two-day slide.
Wednesday brought more detail on the deal itself. Further details explained that Iran would be allowed to resume oil sales immediately upon signing, and the agreement included access to a $300 billion fund to help rebuild Iran’s economy. The IEA also weighed in Wednesday with its first look ahead at 2027. They believe global oil supply is on track to surge roughly 8 million barrels a day next year while demand grows by only 2 million. On the domestic supply side, the weekly inventory report showed crude stocks fell another 8.3 million barrels, leaving U.S. inventories about 6% below the five-year average. Gasoline is also 6% below normal and distillates are 13% below. These inventory deficits are occurring all while refineries are running at 96.7% utilization.
Thursday was the big day of the week. Trump and Iran’s President both signed the memorandum of understanding. Within hours of signing, three Saudi-flagged supertankers carrying a combined 6 million barrels of crude crossed the Strait. Ship-tracking data showed at least 12 million barrels of crude in motion out of the Persian Gulf by midday. Shippers are still moving carefully. In addition, Ukraine also struck another Moscow main oil refinery on Thursday in a major drone attack, the second strike on the facility that week. The strikes were a reminder that Russian energy infrastructure remains under continued pressure.
And then Friday arrived. Switzerland announced that the formal U.S.-Iran peace talks scheduled for today in Geneva will not take place. The postponement does not cancel the signed agreement. On top of that, Iran’s Revolutionary Guard Corps has quietly set up new covert cells in Iraq with the aim of carrying out attacks on Gulf countries that host American forces. That kind of activity is exactly the type of thing that could unravel this deal if it escalates.
The dollar had its biggest two-day rally in three months. The Fed held rates steady Wednesday under new chairman Kevin Warsh, as expected. But Warsh made clear the Fed will not tolerate a resurgence of inflation, and half of the rate-setting committee is now projecting a rate hike by year-end. Two-year Treasury yields jumped 13 basis points in a single day. This was the biggest single-day move in more than a year. These economic decisions affect the strength of the dollar which puts pressure on oil prices. Regardless, national average for gasoline at the pump dipped below $4 a gallon for the first time since March.
One of the more lasting takeaways from this week is how permanently the Hormuz closure has changed the way the oil world thinks about risk. Japan sourced roughly 90% of its crude from the Persian Gulf before the war. It now maintains a steady base of U.S. oil purchases every month and is not going back. Saudi Arabia and the UAE are accelerating pipeline expansion plans to bypass the strait entirely. That infrastructure buildout will reshape the region’s energy geography for decades. And it means the next disruption of the Strait will hit a market that has already started rewiring itself, therefore, taking some leverage out of the hands of Iran.
Chicago had a quiet week, and after the past two weeks of volatility, I will take it. The spot market traded in lock-step with crude oil, inventories are healthy, and basis movements were stable. Diesel prices at the pump should continue to drift lower as inventories replenish with cheaper cost product. Gasoline was mostly stable and I do not expect much change there heading into next week.
Propane continues to trade in a very narrow range and I do not expect to see any meaningful price drop unless crude oil prices collapse further. And given everything that is still unresolved, I would not count on that. The situation looks a bit rosy right now, but we are definitely not out of the woods yet. I still strongly recommend topping off your tank this summer and locking in some heating gallons for next winter before any surprises push prices higher. We have prepay, budget, and price-lock options available. Give us a call and we will get your summer fill scheduled and walk you through your contract choices.
As always, if you have any questions please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford
Sources: Bloomberg, Reuters, Wall Street Journal