Oil prices surged more than 2% on Wednesday following the US military's airstrikes against Iran and the reimposition of crude sales sanctions, stoking concerns that the fragile truce between the two nations could collapse and disrupt Middle East supplies once again.
Brent and WTI Crude Climb
Brent crude futures gained $1.92, or 2.6%, to settle at $76.08 a barrel. US West Texas Intermediate crude rose $1.82, or 2.6%, to $72.26 a barrel. Both benchmarks had already climbed about 3% on Tuesday after the US revoked the general license authorizing Iranian crude sales following Iranian attacks.
Market Sentiment and Supply Risks
ING commodity strategists noted on Wednesday that while the revocation of the license does not fundamentally alter oil market dynamics, it is significant from a sentiment perspective. "It heightens the risk of a breakdown in the temporary deal between the US and Iran," they said.
The US airstrikes were launched in response to Iranian attacks on three commercial vessels transiting the Strait of Hormuz, according to Central Command on Tuesday. Saul Kavonic, head of research at MST Marquee, commented: "The current conflagration is a reminder to the market of how fragile passage through the Strait still is." He added that this presents a contrary indicator to the prevailing sentiment that the market could be flooded with oversupply, which may scare some of the record short positioning to cover. If tensions persist and traffic through the waterway remains below 50% of pre-war levels, the resulting supply constraints could support higher oil prices.
Impact of US-Iran Truce Breakdown
After the US and Iran signed a truce agreement last month, oil prices tumbled back to pre-war levels, and traders amassed large short positions in oil futures, betting that prices would fall further. Expectations of a wave of pent-up Middle East supply coming onto the market had driven those declines.
Attacks on Vessels and Strait of Hormuz Concerns
Iran did not take responsibility for the vessel attacks, but Qatar blamed Iran for them, including one on a Qatari liquefied natural gas tanker, which reported being struck by a drone that caused a fire in its engine room. A Saudi-flagged crude oil tanker, believed to be the supertanker Wedyan, was also damaged off Oman, though the cause was not immediately clear, according to maritime security sources.
These attacks renewed concerns about tanker traffic through the Strait of Hormuz, which carried cargoes equal to about one-fifth of the global energy supply before the war began in February. Iran is asserting its control of the Strait and has ordered ships to use a route closer to its coast rather than one nearer to Oman. The US insists the waterway must remain free to all as it was before the conflict started.
Inventory Drawdowns and Supply Shortfall
Since the war started, nations have drawn down their inventories to compensate for the supply shortfall. US crude oil inventories fell again last week, according to market sources on Tuesday, citing data from the American Petroleum Institute. Analysts polled by Reuters had expected crude stockpiles to decline by about 2.4 million barrels in the week ended July 3.
