Oil Surges on Strait of Hormuz Closure Amid Iran Ceasefire Doubts

Oil markets jolted higher on Thursday as traders absorbed the fragility of a ceasefire between the United States and Iran that was supposed to stabilize the Middle East. May WTI crude jumped nearly seven percent, closing up $6.57 a barrel, while gasoline futures climbed 2.74 percent. The rally reflected a simple, brutal fact: the Strait of Hormuz, the narrow waterway through which a fifth of the world's oil normally flows, remained blocked, and no one could say with confidence when it would reopen.

The blockade had already forced Persian Gulf oil producers to cut output by roughly six percent as their storage tanks filled to capacity. More than 800 vessels sat trapped inside the gulf, unable to move. Another 1,000 ships waited on both sides of the strait, hoping for passage. Before the conflict, about 135 ships transited the strait daily. The arithmetic was stark: less oil moving, more oil sitting still, and global markets tightening by the day.

The ceasefire itself was unraveling almost as soon as it had been announced. Washington and Tehran accused each other of violations, with the fundamental disagreement centering on whether the truce extended to Lebanon, where Israeli military operations continued. President Trump had reportedly asked Israel to scale back those attacks to preserve the Iran negotiations, but the pressure was not holding. Iran's deputy foreign minister warned that any vessel wanting to pass through the strait would need to communicate with Iranian authorities first—a condition that suggested Tehran was in no hurry to restore normal traffic. Meanwhile, Iran hinted at the presence of mines in the waterway, adding another layer of risk to any attempt to reopen the passage.

Saudi Arabia's state oil company, Saudi Aramco, added fuel to the rally by raising the price of its main crude grade to Asian buyers by $17 a barrel for May delivery, the largest single increase on record. That move signaled that even the world's largest oil exporter believed prices would stay elevated. OPEC+ had announced plans to increase production by 206,000 barrels per day in May, but that increase now seemed unlikely given that Middle Eastern producers were being forced to cut, not expand, their output. The cartel was still trying to restore 827,000 barrels per day of the 2.2 million barrel daily cut it had made in early 2024. March production had fallen to 22.05 million barrels per day, a 35-year low.

Complications extended beyond the Persian Gulf. The war between Russia and Ukraine showed no signs of ending, with peace talks in Geneva breaking down as Ukrainian President Zelenskiy accused Russia of deliberately prolonging the conflict. Russia insisted that its territorial demands in Ukraine remained non-negotiable. That standoff meant sanctions on Russian crude would remain in place, keeping Russian oil off global markets. Ukrainian forces had targeted at least 28 Russian refineries over the past eight months and had ramped up attacks on Russian tankers in the Baltic Sea, with at least six vessels hit since November. New American and European sanctions on Russian oil infrastructure were further constraining supply.

The supply picture was complicated by the buildup of crude in floating storage. About 290 million barrels of Russian and Iranian oil sat on tankers, more than forty percent higher than a year earlier, trapped by blockades and sanctions. That stockpile represented both a bearish signal—excess supply waiting for a market—and a bullish one: oil that could not reach buyers was oil that could not meet demand elsewhere. US crude inventories as of early April were 1.5 percent above their five-year seasonal average, while gasoline stocks sat 3.6 percent above normal. Distillate inventories, however, were running 4.2 percent below the seasonal average, suggesting tightness in diesel and heating oil.

Domestic US production had edged down slightly, falling to 13.596 million barrels per day in the week ending April 3, just below the record high set in November. The number of active oil rigs had ticked up by two to 411, but that figure remained near a four-year low. The rig count had collapsed from a five-year high of 627 in December 2022, a sign that the industry had pulled back sharply on exploration and development spending. With the Strait of Hormuz closed, ceasefire talks deteriorating, and Russian crude sanctioned, the market was pricing in a world where oil would remain scarce and expensive for months to come.