Happy Friday!
Oil is ending the week around $83 a barrel, down from where it started Monday. It was one of those weeks where the biggest news stories actually pushed prices lower for the first time in a while. Major news included a sanctions package that turned out to be less scary than anticipated, and a true diplomatic movement on reopening the Strait. Here is what all drove the market this week.
Monday had oil pulling back more than a dollar as traders waited on Washington’s big sanctions announcement. Treasury Secretary Bessent was building up to what he called the greatest financial offensive ever released. The question was who and what would be affected. The US has already sanctioned Iran repeatedly for decades, so this round was expected to target Iran’s trading partners, especially the Chinese independent refiners who have been buying steeply discounted Iranian crude. Iran was not backing down. Tehran warned it could shut down all oil exports from the Gulf entirely if the economic war continues and reissued its standing threat that any ship crossing Hormuz without Iran’s permission risks fines, detention, or seizure. Meanwhile the physical situation told another story. The US Navy blockade has already cut Iran’s crude exports by nearly 90% from a year ago. Fewer than 20 ships crossed Hormuz over the entire weekend. And there is a real dispute over how much oil is actually getting through. Washington and ship trackers are reporting opposite numbers. The SPR dropped another 3.7 million barrels and continues at lows not seen since the early 80’s. US refineries continued to run above 95% of capacity for 11 straight weeks, beating a record 25 years old.
Tuesday was the week’s most important session, and oil moved more than 3% lower. When Bessent’s hyped sanctions details came out, the market’s read was that the substance was much weaker than expected. The new measures hit smaller companies in Iran’s oil trading network. The Chinese buyers of billions of dollars of Iranian crude were left alone. The banks behind those purchases were left alone. The administration held back, most likely because a US-China leaders’ meeting is less than a month away and Washington did not want to rattle China right now. Defense Secretary Hegseth confirmed military force is still on the table, but the shift toward economic pressure is first priority. The Navy blockade meanwhile is continuing to put pressure on Iran. There is a growing backlog of fully loaded tankers stuck in the Persian Gulf and the floating stockpiles of Iranian crude that had built up in East Asia have nearly run dry. Only two tankers crossed the Strait Monday, the lowest count in three months. Asian refiners are on pace to nearly double their purchases of US crude for September versus last month. A Ukrainian drone strike hit an oil refinery in southern Russia’s Rostov region overnight and knocked it offline. A separate fire broke out at a refinery in western Kazakhstan the same day. Don’t discount the Ukraine/Russia war premium on oil prices.
Wednesday was good news for anyone hoping the Strait gets sorted out. Oil dropped for a third straight day on the first diplomatic proposal we have seen in a while. Iran and Oman held new talks and said they had discussed setting up a joint temporary corridor through the Strait and agreed to clear it of mines. Oman’s foreign minister said he is hopeful a formal announcement could come soon. Separately, Pakistan reported significant progress in broader peace talks with Iran following a visit to Tehran. On the supply side, the EIA weekly inventory report showed US crude stockpiles essentially flat, up just 0.1 million barrels to 428.9 million barrels, sitting about 1% above the five-year average. Gasoline inventories fell 2.5 million barrels and remain 6% below normal. Distillates built 2.2 million barrels but are still running 14% below their five-year average. The low levels of diesel inventories is getting close to becoming an issue. Refineries ran at 97.4% of capacity. One bad outage right now could hit fuel prices hard. US gasoline prices are stuck above $4 a gallon and diesel has been climbing back above $5.50. Domestic diesel supplies are at their lowest for this time of year since 1996. t.
Thursday held mostly steady as traders weighed real progress against the reality that nothing is signed yet regarding Oman/Iran’s agreement on the Strait. Iran’s government is under real economic pressure from the US naval blockade. Qatar’s prime minister traveled to Iran to relaunch broader diplomatic talks. Kuwait and Qatar are sending more crude through Hormuz and tanker traffic ticked up to 10 vessels on Wednesday from 8 on Tuesday. Still well below the 10-day average of around 15, but moving in the right direction. However, a tanker was struck overnight reminding everyone of how fragile the situation remains in the Strait. Traffic through the Bab el-Mandeb actually slowed for a second straight day to 19 vessels, down from 24 the day before. There is also a continuing argument over ship tracking data. Washington says 15 million barrels passed through Hormuz in a single day recently, but outside firms tracking ships say they cannot verify anything close to that. The White House is simultaneously pushing the EPA to approve small-refinery biofuel waivers to bring pump prices down. Wholesale diesel prices are up 16% over the past month to nearly $4 a gallon.
Friday closed the week with oil holding near $83. Iran and Oman confirmed a shipping corridor split between each country’s waters. The catch remains the same one it has always been. Iran says ships only get to use the safer central channel if Washington meets its conditions, which have historically meant ending the blockade, paying compensation, and lifting sanctions. Whether those conditions have softened at all is the question heading into the weekend. On the bigger picture, Venezuela is now the second country in months to weigh leaving OPEC, which would further loosen the cartel’s grip on global supply. A senior Chinese oil official this week became the highest-ranking person in China to say the country has hit peak oil demand, as cheap electric vehicles come to market faster than expected. Ukraine struck another Russian oil refinery overnight this week. Russia now warned it could strike British military targets in response to UK-supplied missiles being used against it. Again, don’t stop keeping an eye on Russia.
The Chicago spot market rolled to the October prompt contract this week. There was no major disruption on the September expiration. The drop in crude prices moved gasoline and diesel cost lower. Gasoline fell harder as the summer driving season winds down and winter RVP hits the market. Winter RVP lowers refining costs on gasoline. Diesel dropped with crude but did not fall as far as gasoline. I do expect to see lower retail prices at the pump. Not a huge move on diesel, but gasoline prices should decline more noticeably.
Propane remained fairly steady even as crude fell this week. The moves look to keep current prices in place heading into end of summer. Like a broken record, if you have not called about setting up your contract, please do so. We will probably hold the deadline until the end of next week. There is still time to fill up your tank at the lower summer prices as well.
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