At the close of trading today, the main crude oil futures contract on the Shanghai International Energy Exchange (INE) fell 5.67% to 434.3 yuan per barrel, marking a decline of 5.19%. This downward movement is primarily attributed to the ongoing restoration of navigation through the Strait of Hormuz, which has prompted major Middle Eastern producers, facing high storage levels, to urgently offload inventories, placing immediate pressure on the spot market. Concurrently, intensive maintenance schedules at domestic downstream facilities and persistently weak demand for refined products, coupled with expectations of further U.S. Federal Reserve interest rate hikes bolstering the U.S. dollar, have fueled pessimistic sentiment, leading oil prices to continue their search for a bottom.
Key Driver 1: Swift Supply Recovery and Inventory Liquidation in the Middle East
The easing of export restrictions by Middle Eastern oil producers and their aggressive selling of crude at discounted prices have significantly increased the volume of globally available oil, exerting substantial short-term supply pressure on the market. The United Arab Emirates formally exited the OPEC+ agreement in May, freeing itself from previous production quotas, and has begun gradually releasing nearly 1 million barrels per day of idle capacity. Alongside resumed exports from Iran, Saudi Arabia, and Iraq, and with Gulf nations operating at higher rates to capture Asian market share and alleviate high inventory levels, there has been a concentrated effort to actively lower official selling prices and release large volumes of discounted cargoes. Furthermore, to compensate for fiscal losses incurred during prior blockade periods, these countries have ramped up crude exports. Saudi Arabia and Kuwait have concurrently reduced spot price discounts, flooding the Asia-Pacific procurement market with large quantities of discounted medium and light crude. This has increased the range of import options for domestic refineries, enhanced their bargaining power, and lowered the average cost of imported crude, simultaneously depressing both domestic spot and futures prices. Additionally, sustained high production from non-OPEC producers like the United States and Brazil continues to offset temporary supply shortfalls from the Middle East, significantly boosting the short-term elasticity of global crude supply and expanding the downside potential for futures prices.
Key Driver 2: Sluggish Refined Product Consumption and Intensive Refinery Maintenance
While there is underlying restocking demand due to low physical inventories in China, providing some support for buying interest, the market faces structural imbalances from the sudden influx of Middle Eastern supply. Meanwhile, demand for both crude oil and refined products remains weak. Refineries are proactively reducing operating rates and undertaking maintenance, amplifying short-term domestic market weaknesses. The overall momentum for macroeconomic demand recovery in China is insufficient, with industrial and logistics fuel demand remaining sluggish. Weak infrastructure project starts and a year-on-year decline in long-haul freight turnover are being compounded by the ongoing substitution of electric heavy-duty trucks, eroding diesel consumption. For gasoline, the rising penetration of new energy vehicles, reduced non-essential travel by residents, and previous high prices suppressing driving willingness have led to a slight year-on-year decline in terminal gasoline consumption. Only weak seasonal support from short-distance travel during the summer holiday period is present, insufficient to reverse the overall softness. The situation is more pronounced at the refinery level. Both state-owned and independent refineries in China have entered a concentrated maintenance cycle, leading to a periodic decline in crude processing runs and weakened crude procurement, resulting in temporary spot market oversupply. Continuously narrowing refining margins (crack spreads) are pressuring refinery profitability, further dampening enthusiasm for crude inventory restocking. Consequently, the underlying support from physical buying for the futures market is inadequate, leading to a more pronounced decline in domestic prices compared to international benchmarks.
Market Outlook
On the broader macroeconomic front, persistent U.S. inflation is receding more slowly than market expectations, leading markets to push back the anticipated timeline for interest rate cuts and even price in the possibility of renewed hikes. This has driven the U.S. Dollar Index to fresh yearly highs. As crude oil is globally priced in U.S. dollars, a stronger dollar directly diminishes the purchasing power of non-U.S. economies. The rising local-currency import costs for European and Asian refiners are cooling global physical demand for crude. Concurrently, capital is flowing out of the commodities sector in international crude futures markets, contributing to a synchronized decline across both domestic and international exchanges.
In the short term, the logic of ample near-term supply is expected to dominate price action. However, medium-term factors like low inventories or sporadic shipping lane disruptions could trigger intermittent, pulse-like rebounds. From a risk perspective, two variables warrant attention: first, potential renewed complications in U.S.-Iran negotiations leading to tighter shipping lanes and a temporary bullish rebound; second, a concentrated release of strategic petroleum reserve replenishment demand, providing a short-term boost to crude procurement. However, both factors are likely to be temporary disruptions rather than catalysts that can alter the overarching trend of ample supply and demand. From a trading strategy standpoint, following the completion of this wave of discounted Middle Eastern selling, a calendar spread strategy could be considered, capitalizing on the relative resilience of near-month physical barrels against expectations of looser supply in deferred months. On the price front, short-term upside drivers are lacking. Barring any major, unforeseen geopolitical positive developments, domestic crude oil prices are likely to continue oscillating while searching for a bottom. The core downward pressure continues to stem from the confluence of persistently high Middle Eastern crude supply, weak domestic terminal demand, and the headwind of a strong U.S. dollar.
Risk Advisory: Potential volatility in the U.S. interest rate hike/cut trajectory; renewed complications in the second phase of U.S.-Iran negotiations; stronger-than-expected downstream restocking demand.
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