Crude Oil Prices Fall Back As Iran’s Supreme Leader Reiterates Deal Terms

December WTI crude oil (CLZ26) is down -1.66 (-1.63%), and December RBOB gasoline (RBZ26) is down -0.0443 (-1.41%). 

WTI crude oil prices are trading lower after Iranian supreme leader, Mojtaba Khamenei, called for pursuing conditions that Iranian officials have set with the aim of ending the war. He also called for strengthening ties with neighboring countries after top officials from Iran, Saudi Arabia, Pakistan, and Turkiye met on Monday in Tehran.  Khamenei’s statement came after his meeting today with Iran’s Supreme National Security Council Secretary Mohsen Rezaee where they reportedly discussed the war and the Strait of Hormuz.  Today’s report raised hopes that Iran’s supreme leader might be seeking a deal to end the US naval blockade on Iran and fully reopen the Strait of Hormuz. 

On the US side, President Trump told Fox News on Sunday that it’s “getting to be decision time” on whether he will make a deal with Iran or “finish it off.”  The US is building up military forces in the Middle East into November and is evacuating non-essential embassy personnel in the Gulf region, fueling speculation that the US might launch a new military attack on Iran after next Tuesday’s (Nov 3) US election. 

Markets are awaiting the results of today’s election in Israel to see whether Prime Minister Benjamin Netanyahu can keep his job.  Election turnout is reportedly very high.  No single party is expected to claim a parliamentary majority, meaning it could take time for the leading party to form a majority government.

Despite the ongoing hostilities, oil continues to flow in the Middle East.  Oil transiting the Strait of Hormuz so far in October was 16.7 million bpd according to Kpler and 15.4 million bpd according to Vortexa, approaching pre-war levels of about 19 million bpd.  US Energy Secretary Wright said on Monday that Persian Gulf oil flows have recovered to about 80% of their pre-war level, though refined-product shipments remain constrained.

Higher Saudi crude output is bearish for crude prices.  Saudi Arabia said its Sep crude production rose by 2 million bpd (+40% m/m) to 8.732 million bpd, recovering from a 36-year low in August.  However, Saudi oil production continues to be threatened by Houthi missile attacks on Saudi Arabia and by the Houthi threats to oil shipments near the Bab-al-Mandeb Strait.

Recent attacks by Ukraine on Russian oil infrastructure have curbed Russian crude production and exports. Ukraine attacked Russian fuel-producing plants 15 times in September and 22 times in August, targeting five of Russia’s ten largest oil-processing plants.  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.  Russian crude processing rates recovered slightly to 3.98 million bpd in September as damaged refineries struggle to come back online.

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.

On October 4, OPEC+ agreed to keep oil production quotas unchanged for November.  As a bearish factor for crude, OPEC delegates on August 2 approved their final increase of +188,000 bpd in crude production for September. On paper, the group has restored all 1.65 million bpd 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, OPEC+ may struggle to deliver planned production increases amid Middle East shipping disruptions.  OPEC's Sep crude production rose by +1.12 million bpd to 20.71 million bpd. 

Vortexa reported on Monday that crude oil stored on tankers that have been stationary for at least 7 days rose +8% w/w to 87.42 million bbl in the week ended October 23.

Last Wednesday’s EIA report showed that (1) US crude oil inventories as of October 16 were -3.5% below the seasonal 5-year average, (2) gasoline inventories were -4.9% below the seasonal 5-year average, and (3) distillate inventories were -9.0% below the 5-year seasonal average.  US crude oil production in the week ending October 16 fell sharply by -3.00% w/w to 13.269 million bpd due to disruptions from Hurricane Isaias, down from a record high of 13.979 million bpd posted in the week ended October 2.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ended October 23 rose by +1 rig to 460, slightly below the 1.5-year high of 462 rigs posted on October 9.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.