Geopolitical tensions persist, providing a key driver for the continued recovery in oil prices.
Key Market News and Data
WTI crude oil futures for August delivery settled up $1.68, or nearly 2.02%, at $84.91 per barrel. Brent crude futures for September delivery settled up $1.79, or 2.00%, at $91.01 per barrel. Abu Dhabi Murban crude futures rose 4.61% to $85.53 per barrel. NYMEX natural gas futures for August settled at $2.8650 per million British thermal units. NYMEX August gasoline futures settled at $3.4059 per gallon, while August heating oil futures settled at $4.1266 per gallon.
According to data from the American Petroleum Institute (API), U.S. API crude inventories increased by 2.603 million barrels last week, following a decrease of 564,000 barrels the prior week. API crude stocks at the Cushing, Oklahoma hub fell by 737,000 barrels, compared to an increase of 238,000 barrels previously. API gasoline inventories decreased by 1.379 million barrels (prior: -1.664 million barrels), while distillate inventories increased by 1.759 million barrels (prior: +2.259 million barrels).
Tanker tracking data indicates that Saudi Arabia's crude exports via the two terminals at Yanbu Port reached a record high of 5.9 million barrels per day for the week ending July 17th. The seven-day average export volume through July 20th fell back to 5.5 million barrels per day. This data includes crude shipped to Jizan, where Saudi Aramco operates a refinery, and supplies to power plants along the Red Sea coast. The Houthi group stated its blockade actions were in response to the Saudi-led siege of Yemen's capital, Sana'a, though the group also has ties to Iran. The Houthis also warned shipowners in an email against docking at Saudi ports.
U.S. Central Command stated that U.S. forces completed a new round of strikes against Iran at 9:00 PM Eastern Time on July 20th (9:00 AM Beijing Time on July 21st). This marks the tenth consecutive night of U.S. strikes against Iran. Iran also issued a statement claiming strikes against U.S. targets in Bahrain and Kuwait. Meanwhile, media reports indicate that mediators including Qatar, Egypt, and Pakistan have presented a 10-day ceasefire proposal to the U.S. and Iran.
The Joint Maritime Information Centre (JMIC) reported in an update that following recent attacks, several companies have delayed vessel transits through the Strait of Hormuz, with commercial vessel traffic falling to a three-week low. Ships are now using the southern Omani route and the northern route controlled by Iran. Recent attacks on tankers in Omani waters have further influenced operator behavior, leading to a significant drop in traffic density.
Kazakhstan has been forced to halt pipeline deliveries of crude oil to its main export terminal on Russia's Black Sea coast due to a series of attacks on tankers endangering exports from the landlocked Central Asian nation. The Caspian Pipeline Consortium (CPC) terminal near Russia's port of Novorossiysk was scheduled to stop receiving pipeline crude as tanker companies hesitated to send vessels to the facility over safety concerns. The suspension was slated to begin on Tuesday, though it remains unclear if it has commenced. If pipeline deliveries to the CPC terminal remain interrupted through the weekend, Kazakh oil producers will also be forced to cut output.
Investment Thesis
Despite recent news of third-party mediation efforts, the current geopolitical situation remains tense. On one hand, threats by Houthi forces to blockade the Red Sea, if realized, would significantly impact Saudi Arabia's crude exports of nearly 4 million barrels per day. On the other hand, attacks by Ukraine on Black Sea tankers have led to another suspension of operations at the CPC oil terminal, disrupting exports of 1.7 million barrels per day of CPC crude. In the short term, geopolitical factors remain the primary driver pushing oil prices higher, though subsequent developments require close monitoring.
Strategy Outlook
With the volatile situation in the Middle East, near-term upside risks have increased. However, given the rapid pace of change, a cautious approach is recommended.
Risk Assessment
Downside risks include a liquidity crisis or unforeseen macro events. Upside risks involve an escalation of conflict in the Middle East or a continued decline in the number of tankers transiting key straits.
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