Oil markets are trading lower today, with NYMEX WTI Futures shedding over 1.5% to 90.7 and ICE Brent Crude Futures declining by a similar margin to 93.5.
Crude oil prices keep holding higher as market pessimism grows over the prospect of a firm ceasefire agreement on any front in the war in the Middle East, which ultimately keeps widespread disruptions to global oil supplies in place.
Meanwhile, the failure to achieve a diplomatic breakthrough comes at a time when global oil inventories are critically low and dangerous, on the eve of the summer travel season and high demand.
We hear and read conflicting statements and headlines around the clock regarding negotiations between the United States and Iran to end this war.
But so far, there is no real breakthrough to speak of, and we only see attempts by Donald Trump to spread optimism about progress in the negotiations, perhaps with the aim of forcing oil prices down to limit the political cost of this crisis.
This comes at a time when fundamental obstacles persist, preventing any progress. Iran does not want to make concessions regarding its nuclear program, wants the immediate release of its frozen funds and assets, and insists on a comprehensive ceasefire that includes Lebanon. On the other hand, the United States views these demands as unacceptable and believes that meeting them would constitute a defeat in the war.
Furthermore, there is no near-term prospect for a comprehensive agreement between Hezbollah in Lebanon and Israel, despite announcements of a limited and partial ceasefire there, and this could threaten the stability of any truce with Iran even if one is actually reached. In addition to this, Iran renewed its threats yesterday to reactivate the front in the Bab el Mandeb Strait, which could deepen disruptions in global supply chains and increase the risk of escalation spreading across the region.
Not only that, but the war that has been raging for years between Russia and Ukraine adds more complexity to the global supply crisis. In May, Ukraine launched a record number of attacks on Russian oil refineries, increasing the risk to an oil sector that is already struggling at its lowest levels in 16 years, according to Bloomberg. These attacks could lead to domestic fuel shortages just as summer travel demand increases. According to a Bloomberg analysis of official statements from both countries, Ukraine carried out at least 16 attacks on Russian fuel facilities last month. The data indicates that drones targeted eight of Russia’s ten largest oil refineries in May.
Meanwhile, several reports last May indicated that many countries would see their inventories fall to critically low levels, and that the prolonged war would push us to the minimum operational threshold for oil storage infrastructure.
Based on this narrative, and in light of Iran sticking to its demands and Israel’s desire to escalate on the Lebanon front, I believe that oil prices may remain high for a long time and could hold steady again at levels above 100 dollars per barrel for both West Texas Intermediate and Brent.
On the economic side, we are watching for a batch of labour market numbers from the United States this week. If the job market shows unexpected resilience, the impact of the summer travel season on oil prices could be even greater. This is because demand could show real resilience despite current high levels, potentially driving prices even higher.
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