Happy Friday!
Crude oil markets experienced one of the most volatile weeks in years, with prices set to book their largest weekly increase since 2020. The surge was triggered by a dramatic escalation in the Middle East after the United States and Israel launched strikes inside Iran over the weekend that killed the head of Iran’s ruling leadership. Iran responded immediately with retaliatory attacks on U.S. bases and neighboring countries across the region. In the days that followed, the conflict spread quickly through shipping lanes, oil infrastructure, and regional security alliances, placing the global energy market in a holding pattern as traders assess how long disruptions could last.
The most significant development this week was Iran’s decision to effectively close the Strait of Hormuz after attacks on oil tankers in the region. The strait is the most important shipping bottleneck for crude oil in the world, normally carrying roughly 20 percent of global oil supply. As ships halted entry, more than 150 vessels were forced to wait outside the region, immediately tightening global supply expectations. The conflict intensified throughout the week. Iran launched missile attacks into neighboring countries including Turkey and Azerbaijan and struck vessels operating in the Gulf. Two oil tankers were attacked near Kuwait, with one vessel leaking crude into the ocean. In response, the United States offered to deploy naval escorts to protect cargo ships through the strait and also sank an Iranian warship earlier in the week. Despite these efforts, uncertainty around safe passage continues to keep shipping activity extremely limited.
President Trump escalated the rhetoric further on Friday, stating that the United States will not accept a negotiated compromise with Iran and that the outcome will be either full surrender or continued conflict. The statement pushed crude prices higher again as traders increasingly believe the conflict could last longer than originally expected. At the same time, Trump has given Iran roughly two weeks to respond diplomatically before further escalation. Beyond the immediate military conflict in Iran, the war is beginning to pull additional countries into the tension. Israel ordered evacuations in Beirut and is preparing for potential operations against Hezbollah, while Lebanon and Israel have continued exchanging fire along the border.
The disruption to oil shipments quickly translated into production shutdowns across the Middle East. With shipping lanes blocked and tanker costs skyrocketing, several countries have begun reducing output simply because storage is filling up. Iraq has already cut roughly half of its production, around 1.5 million barrels per day, while Kuwait shut its output after storage facilities reached capacity. Qatar is warning that other Gulf producers may soon face the same issue if exports cannot resume within the next couple of weeks. In addition, portions of refined production in the United Arab Emirates, Qatar, Israel’s Kurdistan region, and other locations were temporarily halted due to security concerns and logistical constraints. Saudi Arabia and the UAE have pledged to increase production to offset lost barrels from Iran, but without open shipping routes it remains difficult to move those barrels to market.
Despite the strong rally in crude prices, U.S. shale producers have been hesitant to increase production quickly. Many companies remain cautious about committing capital until they have greater clarity on whether current price levels will hold. If the conflict resolves quickly and prices fall back, producers risk investing heavily in new drilling only to see prices collapse again.
Meanwhile, refined product markets are beginning to show stress. Diesel supplies are tightening globally as Asian markets struggle to source barrels. The United States, Mexico, and Venezuela are holding onto their inventories, leaving fewer supplies available to ship overseas. Diesel shortages can have significant economic implications because diesel fuels global freight, agriculture, and industrial activity. If diesel supplies tighten further, economic slowdowns can occur rapidly. China is playing a major role in refined product dynamics. The country halted exports of diesel and gasoline this week in order to prioritize domestic supply, effectively tightening global refined product markets even further. In addition, China is sitting on 1B barrels of oil in stockpile, effectively cutting off any need for oil shipments. At the same time, China’s economic growth forecast was revised down to 4.5 percent, the slowest pace in decades. While that weaker growth outlook could eventually reduce oil demand, China’s current strategy of stockpiling refined products is temporarily supporting prices.
The war is also reshaping geopolitical relationships in the global oil market. India continues to rely heavily on Russian oil to maintain supply, especially as Middle Eastern shipments remain uncertain. In response, the United States issued a temporary waiver allowing India to continue purchasing Russian crude to help maintain stability in the global market while the Iran conflict unfolds. At the same time, the United States and Venezuela resumed diplomatic relations this week. The move is designed to encourage additional oil investment in Venezuela and increase future supply capacity. Opening Venezuela’s oil sector to international investment could eventually bring significant additional barrels to market, though infrastructure limitations mean it would take time for production to grow meaningfully. However, the broader geopolitical landscape remains fragile. With the United States heavily focused on the Middle East conflict, some analysts are watching other global flashpoints closely. The possibility of China taking advantage of distracted U.S. military resources in the Pacific, along with North Korea remaining unusually quiet, is creating additional uncertainty in global security dynamics.
Even as geopolitical risk dominates markets, economic data continues to send mixed signals. The EIA reported a larger than anticipated build in crude oil inventory, but not enough to even move the needle a blip on crude oil prices. In addition, all economic data this week for the US showed signs of economic weakness. As of right now, the most money ever is being borrowed from 401k’s as consumers handle high credit card debt and living expenses. The US jobs report showed a loss of around 100k jobs last month, and the unemployment rate ticked higher to 4.7%. Although all the economic data this week in the US supports lower oil prices due to projected lower oil demand, prices are fixated on the Iran conflict until it ends.
The Chicago Spot Market experienced dramatic price movement this week as diesel prices surged nearly 80 cents per gallon. Several factors contributed to the spike. Chicago had previously shipped large volumes of diesel to the East Coast during earlier price arbitrage opportunities, which depleted local stockpiles just as refineries are preparing for seasonal maintenance. Although the Group Spot Market refining system remains relatively long on diesel supply, traders are reluctant to release those barrels because doing so would leave the region short during their refinery turnaround season. As a result, the Chicago spot market remains extremely tight. Gasoline prices also rose during the week but at a slower pace than diesel. Gasoline prices increased roughly 30 cents per gallon, and with crude prices elevated I expect retail gasoline prices to move above $3 per gallon in the near term. Diesel prices will likely rise even further, moving well above $4 per gallon at the pump as crude oil remains elevated.
Propane markets have remained relatively stable despite the volatility in crude oil prices. U.S. propane inventories remain strong, supported by continued domestic oil production and strong storage levels throughout the winter. Unless crude oil prices remain elevated for an extended period, propane prices are unlikely to experience a major surge. With winter nearing its end and demand beginning to decline seasonally, propane markets should remain relatively well supplied along with price stability.
As always, if you have any questions, please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford
Sources: Wall Street Journal, Bloomberg, Reuters
