Oil prices continued their upward trajectory on Tuesday, extending gains after the afternoon Middle East trading window and pushing through the July rally highs during the overnight session. Supply disruption concerns, fueled by threats of a blockade in the Red Sea, have intensified, driving the spot premium for key Middle Eastern crude benchmarks to its highest level in about six weeks. Furthermore, attacks on tankers and the ongoing disruption to the CPC pipeline, expected to last through the weekend, are forcing Kazakhstan to cut oil output, adding to supply-side anxieties. This growing tension is clearly reflected in the crude market's time spreads, which have strengthened significantly.
The coming weeks will be critical in assessing the impact of Houthi actions on Saudi Arabian exports. Prior to the Houthi warning, Saudi crude exports via the Red Sea had hit a record high. According to tanker-tracking data, shipments from two terminals at Yanbu Port reached a record daily average of 5.9 million barrels in the week to July 17, easing slightly to 5.5 million barrels per day in the week to July 20. This data includes supplies destined for the Jizan region and crude for Saudi Aramco's refineries and Red Sea coast power plants. The head of the International Energy Agency has highlighted the heightened security risks to regional energy infrastructure following attacks on the Strait of Hormuz and the Bab el-Mandeb strait, significantly increasing uncertainty over global crude supply. However, the market retains several buffers, as IEA member countries still hold substantial emergency reserves, including over 1 billion barrels of government-controlled stockpiles.
On the geopolitical front, military exchanges between the U.S. and Iran have persisted for ten days. Regarding ceasefire negotiations, Israeli media reported that a 10-day truce proposal was put forward by Iran, while the U.S. administration stated it has no interest in meeting and demanded Iran "pay a price." This presents an interesting dynamic. While oil prices face continued upside risk and refined product prices in Europe and the U.S. remain elevated, the current U.S. administration appears less urgent in its rhetoric to cool the market, unlike during previous periods of high prices. In this environment, if Middle Eastern supplies see a sustained reduction due to blockades, oil prices are poised to climb further. Market participants are advised to carefully manage their timing and approach with caution.
Daily Market Movements
WTI crude oil futures rose $2.56, or 3.13%, to settle at $84.34 per barrel. Brent crude futures gained $2.91, or 3.3%, to close at $91.01 per barrel. INE crude futures advanced 3.15% to finish at 547.4 yuan.
The U.S. dollar index increased by 0.44% to 101.21. The Hong Kong exchange's USD/CNY rate fell 0.17% to 6.7421. The U.S. 10-year Treasury note declined 0.52% to 108.66. The Dow Jones Industrial Average rose 0.74% to 52,224.64.
Key Recent Developments
Middle East Geopolitical Premium Rises Sharply, Dubai Spot Premium Jumps to Six-Week High on Red Sea Blockade Fears
The spot premium for Middle Eastern crude benchmarks surged to its highest level in about six weeks on Tuesday, with Dubai and Murban crude prices each rising nearly $3 per barrel. This followed a declaration by Yemen's Houthi group of a maritime blockade against Saudi Arabia, prompting a market reassessment of risks to key shipping lanes.
Analysts note that if passage through the Bab el-Mandeb strait is obstructed, over 4.5 million barrels per day of Saudi crude and fuel exports from Yanbu Port would be forced to reroute around the Cape of Good Hope. Approximately 70% of these volumes are destined for Asia. The extended voyage of about one month would create logistical bottlenecks, and Very Large Crude Carriers (VLCCs) cannot transit the Suez Canal, creating a natural limit on alternative transport capacity.
Geopolitical risks are already affecting actual trade flows. Sources indicate that two Indian state-run refiners have canceled plans to load crude from Iraq's Basra port, primarily due to safety concerns for navigation in the Strait of Hormuz.
Spot market data confirms the tense situation. The premium of Dubai spot prices over swap contracts increased by about $2.26 to $3.00 per barrel, reflecting the rapid pricing-in of a risk premium for immediate supply availability.
Saudi Red Sea Crude Exports Hit Record Before Houthi Warning
Just before the Houthi group announced its intention to block Saudi oil shipments, Saudi Arabia's crude exports via Red Sea terminals had reached a historic peak. During the Iran conflict, Saudi Arabia shifted some crude shipments from the Persian Gulf to its west coast for export via the Red Sea to international markets. This alternative route played a key role in stabilizing global oil prices. However, with the Houthi declaration of a blockade, this supply channel is now at risk. A successful blockade could push crude futures prices even higher.
Kazakhstan Plans to Halt CPC Terminal Loadings, Potential Forced Production Cuts Loom
Informed sources report that, following recent attacks on multiple tankers, shipping companies are refusing to send vessels to the Caspian Pipeline Consortium (CPC) terminal at Russia's Novorossiysk port due to safety risks. The terminal is expected to stop receiving pipeline-delivered crude, with measures taking effect later on Tuesday.
If the CPC pipeline disruption persists through the weekend, Kazakhstan will be forced to reduce its oil production. This facility is the country's largest conduit for exporting oil to global markets, and its shutdown would significantly impact export capacity.
Several tankers have been attacked at or near the CPC terminal in recent days. Although Ukraine has not claimed responsibility, the attacks involved Western vessels and occurred against the backdrop of the ongoing escalation in the Russia-Ukraine conflict.
Refining Crack Spreads Soar to Post-Ukraine War Highs, Capacity Bottlenecks Keep Gasoline Prices Resilient
Since the outbreak of the U.S.-Iran conflict, the crack spread between gasoline and crude oil has widened sharply, exceeding levels seen during the Russia-Ukraine war and the post-pandemic demand recovery. This metric reflects refining margins and is a core reason why retail gasoline prices have shown greater strength and slower declines compared to crude oil.
Global refining capacity was already impaired during the Russia-Ukraine war. Russia's diesel export ban further constrained fuel supplies. With U.S. refinery utilization rates already near 97%, there is extremely limited room for additional capacity. The continued non-operation of export-oriented refineries in the Middle East has made it difficult to resolve the persistent supply-demand mismatch: a relatively ample crude market versus a tight refined products market.
Data confirms this trend. Gasoline futures have rebounded over 20% from their June low, now less than 10% below their May closing high. While Brent crude has risen about 24% from its recent low, it remains over 20% below its May peak. The shortage premium for middle distillates continues to be a persistent support factor for high energy prices.
The reopening of the Strait of Hormuz is not only about crude supply itself but also concerns whether newly built large-scale refineries in the Middle East can resume product exports. If the current bottleneck cannot be resolved, consumer spending on fuel will remain elevated, squeezing non-energy consumption. Combined with economic slowdown concerns triggered by soaring crack spreads, overall risk appetite in U.S. equity markets is also likely to be dampened.
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