September WTI crude oil (CLU26) closed down -2.88 (-3.12%) on Friday, while September RBOB gasoline (RBU26) fell -0.0726 (-2.18%). This decline saw WTI crude give back approximately half of Thursday’s significant 6% rally. Sep Brent crude oil prices (CBU26) also retreated to the $97 per barrel area, after briefly touching a two-month high of $102 on Thursday. The primary catalyst for this pullback was the continued flow of oil shipments through the Red Sea, despite ongoing threats from Houthi forces.
Red Sea Tensions and Market Volatility
The market’s sharp rally on Thursday, exceeding +6%, was directly triggered by an attack from Iran-backed Houthis on two Saudi Arabian oil tankers in the Red Sea. This incident escalated concerns, suggesting oil disruptions could extend beyond the Strait of Hormuz and directly imperil Red Sea shipping lanes. President Trump, in an interview with Axios on Thursday, indicated he was considering a “massive attack” that would be “bigger than ever before” and was “close to making a decision on it.”
The Houthis have explicitly vowed to blockade shipping linked to Saudi Arabia, warning shipowners against calling at Saudi ports. This directly threatens Saudi oil exports from Yanbu, a crucial Red Sea hub that Saudi Arabia has been utilizing for crude shipments since the war effectively brought shipping through the Strait of Hormuz to a near halt. Concurrently, the US and Iran have engaged in reciprocal attacks for the 13th consecutive day, with the US maintaining its blockade on Iranian oil shipments in the Persian Gulf. The International Maritime Organization warned last Wednesday that transit through the Strait of Hormuz is currently too perilous, leading to a sharp decline in visible transit as Iran continues to target tankers attempting passage. These geopolitical tensions have contributed to a tightening of global crude oil supplies due to reduced flows through the Strait of Hormuz.
Russian Supply Dynamics Amidst Conflict
Crude prices have found some support from intensifying Ukrainian drone attacks on Russian oil infrastructure. According to monthly OPEC data, Russian crude production in June fell to 8.928 million barrels per day (bpd), marking its lowest level in 2.5 years. EA Analytics projects that Russian crude-processing rates will average 3.51 million bpd in July, a 24-year low, primarily due to damage to Russian energy infrastructure from Ukrainian drone and missile attacks. Bloomberg reported that Ukrainian forces have attacked Russian fuel-producing facilities over 50 times this year, impacting at least 24 of Russia’s 34 largest refineries.
By the end of June, approximately 90% of Russian regions had implemented some form of fuel rationing or reported supply issues, a direct consequence of the significant plunge in refining capacity. These strikes have exacerbated a nationwide gasoline shortage, leading to the shutdown of several major refineries and a government ban on nearly all gasoline, jet fuel, and diesel exports. Russia is identified as the world’s second-largest diesel exporter, after the US, according to Vortexa.
Global Supply Increases and Inventory Builds
Despite the domestic refining challenges, stronger Russian crude exports are paradoxically contributing to global oil supplies, exerting downward pressure on prices. Data compiled by Bloomberg indicates that the four-week average of Russian crude exports rose to 4.13 million bpd through June 28, the highest level since Russia’s invasion of Ukraine in 2022. This increase in crude exports is likely a response to the country’s diminished refining capacity.
Further adding to bearish sentiment, OPEC delegates stated on May 14 that the cartel intends to continue a series of oil quota increases over the coming months, aiming to fully restore halted oil production by the end of September. The group had already formally agreed to reinstate about two-thirds of the 1.65 million bpd supply cut implemented in 2023 and plans to further raise output targets, reviving the final portion in three additional monthly stages. On July 5, OPEC+ announced an increase in its crude output by 188,000 bpd for August, though this increase might face difficulties given the revived US-Iran military attacks in the region. OPEC’s June crude production saw a rise of +2.34 million bpd, reaching 18.75 million bpd.
Recent inventory data also presented a largely negative picture for crude oil and products. Vortexa reported on Monday that crude oil stored on tankers stationary for at least seven days surged +31% week-over-week to 90.03 million barrels in the week ending July 17. Wednesday’s weekly EIA report showed an unexpected increase in crude inventories by +2.01 million barrels, contrary to expectations of a -1.95 million barrel decline. EIA gasoline supplies also rose by +765,000 barrels, against an anticipated -1.9 million barrel decrease, and distillate stockpiles built by +1.4 million barrels, exceeding expectations. Conversely, crude supplies at Cushing, the delivery point for WTI futures, decreased by -624,000 barrels. Despite these builds, the EIA report highlighted that as of July 17, US crude oil, gasoline, and distillate inventories remained below their respective seasonal five-year averages by -5.3%, -7.1%, and -9.6%.
US Production and Rig Activity
US crude oil production in the week ending July 17 experienced a slight decline of -0.5% week-over-week, settling at 13.798 million bpd. This figure remains just below the record high of 13.862 million bpd recorded in the week of November 7. Baker Hughes reported on Friday that the number of active US oil rigs in the week ended July 24 decreased by -2 to 450 rigs. This is slightly below the 1.25-year high of 452 rigs observed in the week ended July 17.
The recent retreat in oil prices reflects a complex interplay of geopolitical anxieties and fundamental supply-demand dynamics. While the Red Sea and Strait of Hormuz continue to present significant risks, the ongoing flow of oil shipments in the Red Sea, coupled with increased Russian crude exports and OPEC+’s commitment to boosting output, appears to be easing immediate supply fears. This, alongside unexpected inventory builds in the US, suggests that despite persistent regional conflicts and disruptions to Russian refining capacity, the global market is currently finding a precarious balance, leading to a moderation of the sharp gains seen earlier in the week.
