Information: The EIA's May STEO report revised the April shut-in capacity for six Middle Eastern countries (Iraq, Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain) upward to 10.5 million barrels per day (mb/d). The forecast for global inventory drawdown in the second quarter of 2026 was raised to 8.5 mb/d per day. The report assumes a substantial closure of the Strait of Hormuz by the end of May, with transit volumes beginning a gradual recovery from June, though a return to pre-conflict export flow levels will require considerable time. The EIA maintains its forecast for an average Brent price of around $106 per barrel for May-June, declining to $89 in the fourth quarter of 2026 and $79 in 2027. Regarding negotiations, Vance indicated that U.S.-Iran talks are progressing, focusing on diplomatic channels, though both Iran and Israel have stated readiness to return to conflict. During his visit to China, Trump explicitly stated that U.S.-China trade negotiations take precedence over the Iran issue, suggesting a lack of high-level U.S. direct advancement on the Iranian situation in the short term.
Market Performance: International markets traded in a narrow range at high levels, with reduced activity in market news. Notably, short positions increased in near-month and far-month contracts. The Brent July contract settled at $107.05 per barrel (-0.67%). The WTI July contract settled at $102.21 per barrel, with intraday gains narrowing after a cumulative 7.6% increase over the previous three days. The SC2606 contract settled at 622.2 yuan per barrel, with the domestic market continuing its relative weakness. Recently, there has been a noticeable increase in short positions in the secondary front-month and near-month far contracts, with relatively low trading activity, as the market awaits new catalysts. Regarding the price spread between domestic and international markets, the strength in international markets combined with sustained pressure on the domestic market has led to a further widening of the negative spread.
Supply: Institutional data have both revised supply deficit estimates upward, with the scale of supply disruptions continuing to exceed previous expectations. The EIA raised its estimate of April shut-in capacity in the Middle East to 10.5 mb/d, a significant increase from the previous estimate of 9.1 mb/d. Saudi production has fallen to its lowest level since 1990. Recent Iranian export shipments have experienced their first sustained disruption. Asian refineries, including those in Japan, are actively seeking alternative sources to Persian Gulf supplies. Current rerouting capacity (approximately 9 million barrels per day) is far from sufficient to cover the shortfall.
Demand: Inventories are drawing down more sharply than expected, with the peak consumption window remaining open. EIA weekly crude oil inventories drew down by 4.3 million barrels, nearly double the expected amount. Inventories in March and April have already drawn down rapidly. Distillate stocks increased slightly by 190,000 barrels, the first increase since March, temporarily alleviating some tightness on the product side. The IEA has explicitly warned that even if the conflict ends next month, the market could still face severe supply shortages until October. Peak demand during the July-September high season is expected to coincide with the period of fastest inventory drawdown. Driven by high crack spreads, seasonal increases in refinery run rates in the Northern Hemisphere are expected to continue, with subsequent data to be watched for confirmation.
Inventory and Structure: The global pace of inventory drawdown is significantly exceeding earlier forecasts, with both the IEA and EIA revising their deficit estimates upward. The EIA has revised its forecast for the average daily global inventory drawdown in Q2 2026 from a previous 5.1 mb/d to 8.5 mb/d, compressing the previously estimated three-month inventory buffer. The Brent backwardation structure persists, with far-month contracts remaining relatively strong. The first slight increase in distillate stocks provides marginal relief to the product-side backwardation, but the overall tight structure remains unchanged. Domestically, SC prices continue to trade at a discount to international benchmarks due to high domestic inventories, weak demand, and the withdrawal of speculative capital. The negative spread between domestic and international prices has widened, and this divergent pattern is unlikely to reverse in the short term.
Conclusion: Market assessments of inventory safety cushions are being revised. The previous expectation of a three-month buffer, based on ongoing upward revisions to institutional data, is no longer tenable. Fundamental support for oil prices is rapidly shifting from expectations to tangible evidence. With reduced activity in U.S.-Iran geopolitical news and Trump prioritizing U.S.-China trade, near-term geopolitical drivers have weakened marginally. The market is primarily digesting this through high-level consolidation.
Recommendation: Maintain a bullish bias.
Risk Warnings: Unexpected diplomatic signals related to the U.S. and Iran during the summit period could lead to expectations of eased tensions and a rapid market correction. A continued rise in distillate inventories could reverse the product-side drawdown trend. A persistent widening of the SC domestic-international price spread beyond normal arbitrage ranges could lead to further contraction in domestic market liquidity.
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