This was a week that started with oil looking like it was finally settling down and ended with analysts questioning whether the Strait of Hormuz will ever be reliably open again. A lot happened this week!
Monday opened quietly. WTI slipped to around $68/barrel, down about half a percent, after OPEC and its allies agreed over the weekend to pump another 188,000 barrels a day starting in August. On the surface that sounded like a lot of new supply hitting an already recovering market, but the reality was more nuanced. Those barrels were not new production. They were countries slowly climbing back toward levels they had pledged before the war. Gulf exports had already jumped more than 3 million barrels a day in June compared to May, topping 10 million barrels a day for the first time since the conflict began. The last tankers trapped inside the Strait during the war were finally starting to make it out. Chinese refiners were buying discounted Middle Eastern crude as fast as it arrived. Monday felt like crude oil was finally finding balance.
Tuesday was the first warning of the situation changing. Iran’s Revolutionary Guard fired missiles at ships in the Strait of Hormuz, striking a Saudi crude oil tanker and another vessel. Iran’s foreign minister said peace talks were off the table as long as Trump kept threatening strikes. The fragile ceasefire looked like it was on its last leg. In addition, Saudi Arabia announced it was studying an expansion of its East-West crude pipeline to the Red Sea. The project would let it move up to 7 million barrels a day to export markets without ever crossing the Strait. Clearly Gulf countries are starting to plan for permanent Strait issues.
Wednesday was the pivotal day. The chain of events moved fast. Iran struck commercial vessels, the U.S. launched airstrikes on Iran’, Iran retaliated against U.S. military sites in Bahrain and Kuwait, and then Trump declared at the NATO summit that the interim peace deal was over. WTI jumped more than 5% to $74.44 in a single session. Tankers turned back from the Strait rather than risk the crossing. Washington reinstated full sanctions on Iranian oil starting July 17. The EIA’s weekly data that afternoon added more color to the picture. Crude inventories actually built by 3 million barrels. This was the first build since mid-April. But distillate stocks dropped 5 million barrels, landing 12% below their five-year average.
On Thursday traders seemed to take a breath and reassess the situation. Shipping through Hormuz had nearly stopped. Only about 20 commodity carriers crossed in either direction on Wednesday, the lowest daily count since before the June deal. And Thursday even that number had decreased. Country representatives were urging shipping companies to pause movement. The concern is not just this week’s fighting. As long as the U.S. and Iran are fighting for control of the Strait, every ceasefire is just a pause between confrontations.
The diesel story also came into sharper focus Thursday. Russia announced a ban on diesel exports through July 31st as a direct result of Ukraine’s drone campaign against Russian refineries. Moscow’s domestic fuel situation had deteriorated enough that it needed to keep supply at home. Combined with Gulf refineries still running at less than half of prewar capacity, the global diesel market was left without its two biggest emergency supplies at the same moment. The crack spread, the gap between what crude costs and what a barrel of gasoline or diesel sells for, had climbed to roughly $57 a barrel, near its highest level since 2022. Crude prices still have come down a lot from their war peaks. But diesel prices were not following due to tight world supplies.
Friday brought a slight pullback, but oil was still on track to finish the week well above where it started Monday. Trump said he did not think the war would restart. The U.S. and Iran were reportedly still talking through back channels despite the fighting. The IEA confirmed what the market had been feeling all week. Crude is becoming well supplied, but refined products remain exceptionally tight. Gulf refineries are still offline, and product exports from the region are running below half of prewar levels. That gap will not close until those facilities restart. And that takes months, not days, regardless of what happens with Iran. On a more positive note, governments around the world are lining up to rebuild the emergency reserves they drew down during the war. Analysts estimate that strategic petroleum reserve purchases could add up to roughly 664,000 barrels a day of demand through the middle of 2027. This demand increase will help absorb some of the supply OPEC is putting back into the market and give prices a floor. I do not expect oil to collapse, even if the Iran conflict ends.
The Chicago market tracked crude oil closely through the week’s volatility. Prices climbed sharply on Wednesday alongside WTI, then retreated somewhat on Thursday and Friday. Even with those pullbacks, I expect to see retail prices on gasoline and especially diesel move higher in the days ahead. Crack spreads here in the U.S. are at their highest level since 2022, which means refiners are being rewarded handsomely for every gallon of gasoline and diesel they produce. The export arbitrage right now is extraordinary, and if domestic refineries are running at the limit to serve overseas markets, that will eventually show up as tighter supply closer to home. I am watching the Gulf situation closely this weekend.
Propane prices stabilized this week after falling the week before. Summer fills are in full swing, and we are currently at the lowest price of the year so far. I continue to strongly recommend topping off your tank this month or in August and locking in some heating gallons for next winter now. The geopolitical situation can shift quickly, and when it does, prices move fast. Right now you have an excellent opportunity to secure supply at favorable levels before the fall heating season.
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