Happy Friday!
This was another week where hope appeared on Monday, reality set back in by Friday. Oil is trading near $104 a barrel as I write this after Trump announced overnight that the United States doesn’t need the Strait of Hormuz open. The comment sent prices up more than 2% to start the day. The pattern of recent weeks has become very familiar. Peace talks raise hopes, oil drops, then talks go nowhere and oil shoots right back up. And again, there was a ton of information released this week for discussion.
The week started where last week left off, with Trump calling Iran’s response to the latest US peace proposal unacceptable on Sunday, erasing most of the prior week’s losses in a single Monday session. The Saudis delivered the week’s most surprising announcement on Wednesday. Saudi Arabia has been secretly conducting its own military strikes on Iran throughout this war. The attacks from the kingdom were never publicly acknowledged, including a strike on an Iranian refinery that took out a significant portion of production. Combined with the fact that the UAE has also been quietly striking Iran throughout the conflict, this war has far more active participants than news first suggested.
The announced supply numbers continued to deteriorate this week. The IEA dropped a major revision this week, now projecting a global supply deficit for all of 2026. Just last month the IEA was projecting a surplus. The EIA changed their supply call as well. They believe that the Middle East offline output which is currently 10.5 million barrels per day in Apri will rise to 10.8 million barrels per day in May. In addition, satellite images of Iran’s main Kharg Island export terminal suggest shipments have stopped completely in recent days.
Official US inventory data from the EIA confirmed another sharp week of draws: crude stockpiles fell 4.3 million barrels, gasoline dropped 4.1 million barrels and is now 5% below the five-year average, and diesel inventories remained flat but are running 9% below its five-year average. Gasoline imports into the East and West Coasts fell roughly 50% week over week, which tells you how hard it has become to source foreign supply.
There are a few market conditions that are keeping oil prices from blowing out higher: record US oil exports which hit an all-time high of more than 14 million barrels per day late last month, and Strategic Petroleum Reserve drawdowns at a record pace of 1.22 million barrels per day, and China cutting imports and instead using its massive reserves to resell barrels to European and Asian buyers. None of these cushions are sustainable. China’s selling can probably continue for only about three more weeks. When these three buffers run out, prices will need to move higher. If inventories keep falling at the current pace, crude could spike to $150 a barrel. I hope beforehand we find some solution to moving global crude supplies.
Trump’s two-day summit with Xi Jinping in Beijing produced nothing regarding the war in Iran. But both leaders agreed the strait must be open and Iran cannot have nuclear weapons. However, neither side offered a path to solving the issue. Xi expressed interest in buying more US oil, but China has not imported a single barrel of American oil since May 2025 because of the 20 percent tariffs. Then after the summit, Iran made clear on Friday that Tehran is not feeling any new pressure. They have no trust in the US and will only negotiate if Washington is serious. In addition, they announced that returning to fighting is on the table.
American economic data was not great this week either. Consumer sentiment recently hit a record low. US consumer inflation hit 3.8 percent in April, driven almost entirely by energy costs. Now Trump is backing a suspension of the federal gas tax, which would shave about 18 cents off the current national average of more than $4.50 a gallon. The move is posturing and will do nothing to put an influential amount of money in the hands of consumers. Kevin Warsh was confirmed as Federal Reserve Chair and took over immediately this week. The situation he is facing is not great. Inflation is near 4 percent, the economy slowing, and an oil shock with no end in sight. Traders are waiting to see how Warsh will approach the current situation. And lastly, both the EIA and IEA this week cut their global oil demand forecasts due to predictions that consumers and businesses will purchase lest products at these prices, and airlines are struggling to keep operating at these higher prices and supply crunch. If demand drops, that would be the first demand drop since COVID.
On the bright side, Gulf producers are building around the Hormuz problem for the long run. The UAE announced Friday it will accelerate construction of a new pipeline that will double its export capacity, completely bypassing the strait, by 2027. Saudi Aramco ramped up its East-West pipeline to 7 million barrels per day in just eight days, keeping roughly 60 percent of the kingdom’s pre-war export capacity flowing.
One last geopolitical nugget. Ukraine also kept the pressure on global supply from a different direction, having doubled the number of Russian refineries struck with drones this year. Russia’s April oil output fell 460,000 barrels per day as a result. And Russia continues to pummel Ukraine with large scale attacks. Sometimes we forget about the war in Ukraine. However, the war is still affecting oil markets and needs to stay on the radar.
Chicago had another wild ride this week. After diesel differentials shot up over $1.00/gallon at the end of last week and then collapsed, we had a near-exact repeat this week. Prices jumped over 60 cents/gallon for two days and then came back down. The volatility has made pricing for retail an absolute nightmare. I am optimistic that the worst is behind us. Three refiners have completed their turnarounds and are ramping up production. Another one was able to fix their coker unit rather than replace it. The remaining issue is the largest refinery in Chicago is still not at full capacity due to both electrical issues from a prior power outage and an employee strike. I do believe we will see one or two more smaller differential drops in diesel as the market stabilizes. It looks like for now diesel prices have peaked. Gasoline differentials have also stabilized. I do expect diesel pump prices to start coming down from their record highs.
Propane has continued to hold fairly steady, but futures pricing has started to move higher along with crude. I highly recommend filling your tank now if you can. I believe we are potentially at the lowest price for the summer, and there is a greater probability of prices moving higher than lower. I also strongly recommend contracting for next heating season. The unpredictable volatility in global markets is not going away anytime soon, and every customer should have their heating costs locked in for budget purposes. The potential inflation in the broader economy looks very high so it’s best to have your heating bill protected.
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
