Crude Holds Gains as Hormuz Stays Shut, Despite Ceasefire-Extension Reports and Bullish EIA Draws

July WTI crude was up 37 cents, or 0.42%, on Thursday, and July RBOB gasoline gained 1.68 cents, or 0.55%. Both had started the day lower. They recovered after US forces struck Iranian military targets for the second time this week and Kuwait said it had responded to Iranian missile and drone threats.

The gains did not hold cleanly. Axios reported that the US and Iran had reached a deal to extend their ceasefire by sixty days and to open negotiations on Iran's nuclear program. President Trump still has to approve the terms. Under the memorandum of understanding, shipping through the Strait of Hormuz would be described as "unrestricted," and Iran would have 30 days to clear all mines from the waterway. Prices gave back most of their gains on that report, then turned higher again when the weekly inventory data from the Energy Information Administration came out.

Other developments pulled in different directions. The US Treasury added Iran's Persian Gulf Strait Authority to its Iran-related sanctions list, aiming to stop Iran from profiting by charging tolls on vessels passing through Hormuz. Israel stepped up attacks on Lebanon and said its ground forces would push further into the country, which could complicate US-Iran talks on an interim peace deal.

The backdrop is a strait that remains essentially closed. About a fifth of the world's oil and liquefied natural gas moves through it. Goldman Sachs estimates Persian Gulf crude output has been curtailed by about 14.5 million barrels per day, and that the disruption has already drawn nearly 500 million barrels from global crude stockpiles, a figure it says could reach a billion barrels by June. Gulf producers have cut output by roughly 6% as local storage fills. The International Energy Agency said earlier this month that observed global oil inventories fell at about 4 million barrels per day in March and April, that the market will stay "severely undersupplied" until October even if the conflict ends next month, and that more than 80 energy facilities have been damaged, with recovery possibly taking up to two years.

The EIA report showed tightness at home. US crude inventories fell by 3.33 million barrels, more than the 3.0 million expected. Gasoline stocks fell by 2.57 million barrels against an expected 2.29 million. Distillate stockpiles dropped by 2.1 million barrels to a 23-year low, versus an expected 1.4 million. Crude at Cushing, the delivery point for WTI futures, fell by 2.79 million barrels. As of May 22, crude inventories were 2.0% below the seasonal five-year average, gasoline 5.5% below, and distillates 10.8% below. US crude production rose 0.1% to 13.715 million barrels per day, slightly under the record of 13.862 million set in the week of November 7. Baker Hughes counted 425 active US oil rigs in the week ended May 22, up 10 to a 10.5-month high.

OPEC+ is a bearish factor in principle. On May 14, delegates said the group intends to keep raising quotas over the coming months, finishing the return of halted production by the end of September. It has agreed to restore about two-thirds of the 1.65 million barrel-per-day cut made in 2023, with the remainder to return in three more monthly stages. On May 3 it set a 188,000 barrel-per-day increase for June after 206,000 in May. Any hike looks unlikely to matter, though, since Middle East producers are being forced to cut. OPEC's April output fell by 420,000 barrels per day to 20.55 million, a 35-year low.

Russia adds to the supply squeeze. The latest US-brokered Geneva meeting on the Russia-Ukraine war ended early after Zelensky accused Russia of dragging out the war. Russia says the territorial issue is unresolved and sees no hope of a long-term settlement until its territorial demands are accepted. Ukrainian drones and missiles have hit at least 30 Russian refineries over ten months, including at least 21 strikes on refineries, export terminals and pipelines in April, pushing Russian refinery runs to 4.69 million barrels per day, the lowest in 16 years per Bloomberg data. US and EU sanctions continue to restrict Russian exports.

The next thing to watch is whether Trump approves the memorandum and whether Iran begins clearing mines. Even then, the IEA's outlook suggests supply stays tight until October.