Oil prices are declining today, weighed down by diplomatic expectations for peace in the Middle East despite ongoing territorial gains by Yemen’s Houthi rebels, which keep disrupting shipping lanes, and continued attacks on Russian oil infrastructure that keep tightening global supplies. October WTI crude oil (CLV26) has dropped -0.17 (-0.18%), while October RBOB gasoline (RBV26) has risen +0.0673 (+1.94%). The increase in gasoline came from refinery economics: the crude crack spread reached a record high, pushing refiners to purchase crude and convert it into gasoline and diesel.
Today the dollar index ($DXY) climbed to a 7-week high, a development that weighs on energy prices. Crude oil declined on word that Iran will open the Strait of Hormuz anew within seven days should the US remove its blockade. The slide halted at its lowest point when the crude crack spread reached a record high, which prompted refiners to snap up crude for conversion into gasoline and diesel.
Iran’s Offer to Reopen Hormuz
Today, crude prices dropped, and at the same time, Iran put forward a proposal to reopen the Strait of Hormuz within seven days if the US lifts its blockade of Iranian ports, according to Japan’s Kyodo News Agency.
Signs of Diplomacy Ease Supply Worries
Signs that diplomacy could put an end to Middle East hostilities are putting downward pressure on crude prices as well. A representative for Iran’s Islamic Revolutionary Guard said that “if our national interests require us to negotiate alongside the war, we must negotiate.”, while people familiar with the situation reported that Saudi Arabia is in the early stages of restarting its East-West pipeline and plans to resume crude exports from its Red Sea port of Yanbu later this week.
Admiral Brad Cooper, who leads US Central Command, says crude flows through the Strait of Hormuz over the past two weeks are running at a six-month high. The European Union’s Sentinel 2 showed oil supertankers with the capacity to collect 14 million bbl of oil at Saudi Arabia’s satellite data shows export installations inside the Persian Gulf are active, suggesting the country has redirected its crude exports back toward the Strait of Hormuz after shutting down its East-West pipeline.
Pipeline Shutdown Still Weighs on Prices
Last Tuesday, crude oil rallied to a 4-month high amid worries that global supplies could tighten following Saudi Arabia’s closure of its East-West pipeline. That 750-mile-long conduit carries 7 million bpd and was shut down as a precautionary measure after attacks by Houthi rebels. The pipeline transports oil from the Persian Gulf region toward the Red Sea, where it can then be loaded onto tankers.
European buyers have learned that Saudi Aramco is holding back oil shipments to them due to the closure. The price of crude holds up further on news that Yemen’s Houthi rebels are striking energy installations in Saudi Arabia, which has caused several oil facilities to stop producing. The kingdom’s crude output in August dropped to 6.238 million bpd, the smallest since 1990.
Houthi Advances Raise Supply Concerns
The Houthis now hold ground along the Red Sea coast of Yemen. Last Tuesday, they won control of two islands close to the Bab-al-Mandeb Strait. Before that, they had already taken Perim Island and the Red Sea port city of Mokha at the southern end of the sea, giving the group a firmer base from which to strike passing vessels.
For the last two months, Saudi Arabia has relied on the Red Sea for the bulk of its oil exports after the Strait of Hormuz was shut down. Now, rising tensions with the Houthis are threatening that shipping lane.
Global Tightness From Multiple Sources
Vitol Group said global oil markets are tightening, with about 2 million bpd lost from Middle East crude exports and a further 2 million bpd from Russia due to Ukraine’s drone attacks. Data from Bloomberg, Kpler and Vortexa showed Saudi Arabia’s Aug crude exports dropped to about 3 million bpd, the lowest in 9 years.
EA Analytics reports that Russian crude-processing levels averaged 3.51 million bpd in July, marking the lowest in 24 years, due to harm from drone and missile attacks. OPEC secondary source estimates place Russia’s July crude production at 8.89 million bpd, the lowest in six years.
On August 28, Reuters reported that Russia’s output of gasoline dropped to roughly 80,000 tons daily in August, meeting just 70% of the nation’s need for it, which has created fuel shortages throughout the country.
Bearish Factors Weighing on Crude
The International Energy Agency (IEA) warned on September 11 that high oil prices and restricted supply will cause the biggest drop in global oil demand this year since the Covid-19 pandemic. Despite that projection, 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 restricted supply from 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.
On August 2, OPEC delegates voted to raise their crude production ceiling for September by +188,000 bpd. That move completes the restoration of all 1.65 million bpd of the supply reduction the group adopted in 2023. The group says it intends to keep output flat through the end of the year. Yet achieving those OPEC+ production gains could prove hard given ongoing US-Iran military clashes in the region. Output from OPEC’s Aug crude production declined by -900,000 bpd to 19.91 million bpd.
Inventories Tell a Mixed Story
On Monday, Vortexa reported a decline in crude oil held aboard stationary tankers. The volume of oil sitting idle for at least 7 days dropped by -8.5% from the previous week, settling at 88.58 million barrels in the week ending September 18.
Last Wednesday’s EIA report showed US crude oil inventories as of September 11 were +0.8% above the seasonal 5-year average, gasoline inventories were -4.8% below the seasonal 5-year average, and distillate inventories were -12.8% below the 5-year seasonal average.
What Traders Are Watching
There is a split picture, yet crude faces real strain. Diplomatic talks ease supply concerns, though Houthi advances and attacks on Russian infrastructure hold tightness in place. Traders watch the Strait of Hormuz, the East-West pipeline, and Saudi Arabia’s Red Sea shipments with close attention.
- Diplomatic signals ease tension.
- Pipeline restarts could restore flows.
- Drone attacks tighten Russian and Middle Eastern supplies.
- Inventory draws support crude.
It remains to be seen whether the push for peace or the squeeze on supplies carries the day in the coming weeks.
Source material: “Crude Oil Prices Pressured by Diplomatic Hopes in the Middle East,” Yahoo Finance.
Get the Notebook.
The day's best stories and every fresh verdict, in plain English, in your inbox by seven. One email a day, no more.