Crude Prices Rally on Heightened Risks to Middle East Oil Supplies

November WTI crude oil (CLX26) closed up +2.45 (+2.66%) on Thursday, and November RBOB gasoline (RBX26) closed down -0.0074 (-0.22%).

Crude oil and gasoline prices settled mixed on Thursday. Crude prices rose sharply on Thursday after Iran threatened to expand the war in the Middle East, dimming the outlook for a deal to reopen the Strait of Hormuz. Crude prices also rose Thursday after Saudi Arabia said it came under missile attack from Houthi militants in Yemen, who fired missiles toward the Red Sea port of Yanbu and the city of Taif.

However, crude prices fell back from their best level, and gasoline prices turned negative, after a Reuters report said US and Iranian negotiators are exploring a phased deal that would see Iran reopen the Strait of Hormuz and the US lift its blockade of Iranian ports. Qatari officials are mediating the negotiations.

Crude prices initially surged on Thursday after a senior member of Iran’s Revolutionary Guard Corps warned that Iran may expand the war to the Indian Ocean if the US or Israel attacks again. Optimism that the US and Iran could reach a settlement that would help normalize energy flows through the Strait of Hormuz has receded over the past two days amid aggressive rhetoric from President Trump and defiance from Iran.

The US and Iran remain at odds over key issues, including control over the Strait of Hormuz. US Secretary of State Rubio said on Wednesday that Iran fired at commercial ships today in the Strait of Hormuz and that peace talks with Iran are being impeded by Iran’s Revolutionary Guard leaders. Iranian President Pezeshkian said on Wednesday that Iran won’t allow freedom of navigation through the Strait of Hormuz while sanctions and a US blockade remain in place.

Crude oil prices rallied to a 4‑month high last Tuesday on fears that global oil supplies will tighten further after Saudi Arabia shut down its key East‑West pipeline, disrupting a key route that bypasses the Strait of Hormuz. The 750‑mile‑long East‑West pipeline, which carries 7 million bpd of crude, was closed as a precaution following attacks by Houthi rebels. The pipeline moves oil away from the Persian Gulf toward the Red Sea, where it can be loaded on tankers. However, Saudi Arabia said it plans for a meaningful resumption of its East‑West pipeline to the Red Sea by Saturday.

Crude also has support as Yemen’s Houthi rebels target energy facilities in Saudi Arabia, forcing several oil facilities to halt production. Saudi Arabia said that its crude production in August fell to 6.238 million bpd, the lowest since 1990.

The advances by the Houthi rebels to take territory along the Red Sea in Yemen are also contributing to concerns about tighter oil supplies from the Middle East. Last Tuesday, the Houthis captured a pair of islands near the Bab‑al‑Mandeb Strait. That followed their seizure of Perim Island and the Red Sea port city of Mokha at the southern end of the Red Sea, putting the group in a stronger position to attack ships. Since the closure of the Strait of Hormuz, Saudi Arabia has pivoted to the Red Sea to export most of its oil over the past two months. However, escalating tensions with the Houthis have disrupted that route.

More crude supplies are leaving the Middle East, a bearish factor for prices. Data compiled by Bloomberg from the European Union’s Copernicus satellite shows oil supertankers with the capacity to ship 12 million barrels of crude were at Saudi Arabia’s Persian Gulf export installations on Tuesday.

Vitol Group said that global oil markets are continuing to tighten, with the loss of about 2 million bpd from crude exports in the Middle East, and a further 2 million bpd from Russia as a result of Ukraine’s drone attacks. Data compiled by Bloomberg, Kpler and Vortexa showed that Saudi Arabia’s August crude exports dropped to about 3 million bpd, the lowest amount in 9 years.

Ukraine has intensified drone attacks on Russian oil infrastructure, curbing Russian crude production and exports. According to EA Analytics, Russian crude‑processing rates averaged 3.51 million bpd in July, the lowest in 24 years, amid damage to Russian energy infrastructure caused by drone and missile attacks from Ukraine. The attacks on Russian oil infrastructure knocked Russia’s crude production in July to 8.89 million bpd, the lowest in six years, according to secondary source estimates published by OPEC. Meanwhile, Reuters reported on August 28 that Russia’s gasoline production fell to about 80,000 tons a day in August, only 70 % of domestic demand, causing shortages across the country.

On the bearish side for crude, the International Energy Agency (IEA) on September 11 warned that high oil prices and restricted oil supply will cause the biggest drop in global oil demand this year since the Covid‑19 pandemic. Despite the projected demand drop, the IEA raised its estimate for this year’s global oil deficit to 1.7 million bpd from last month’s 1.3 million bpd estimate due to the restricted supply caused by the US‑Iran war. The IEA said the return of a global oil surplus will be delayed until 2027, later than its previous estimate of late 2026.

As a bearish factor for crude, OPEC delegates on August 2 approved their final increase of +188,000 bpd in crude production for September. The group has now restored all 1.65 million bp of the supply cutback it made in 2023 and said it plans to hold output steady for the rest of the year after the September hike. However, the planned OPEC+ production increases may be difficult to achieve amid persistent US‑Iran military attacks in the region. OPEC’s August crude production fell by –900,000 bpd to 19.91 million bpd.

Vortexa reported on Monday that crude oil stored on tankers that have been stationary for at least 7 days fell –8.5% w/w to 88.58 million bbl in the week ended September 18.

Wednesday’s EIA report showed that (1) US crude oil inventories as of September 18 were +2.1% above the seasonal 5‑year average, (2) gasoline inventories were –5.6% below the seasonal 5‑year average, and (3) distillate inventories were –11.9% below the 5‑year seasonal average. US crude oil production in the week ending September 18 fell slightly to 13.939 million bpd, just below the record of 13.947 million bpd from the week of September 4.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ending September 18 rose by +2 to 452 rigs, just below the 1.25‑year high of 455 rigs from the week of August 14.

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