Middle East energy supply risks continue to intensify, and combined with pre-weekend short covering and options hedging buying, international crude oil moved further higher.
During early U.S. stock market trading on Friday, the 23rd, U.S. WTI crude oil briefly approached $103.30 per barrel, with an intraday gain of more than 3.8%; Brent crude oil briefly broke above $117.40 per barrel, rising nearly 3.8% on the day. If the rally holds through the close, U.S. crude would rise for a second consecutive session after two days of declines and could set a closing high in more than a month; Brent would rise for a third consecutive session and at least a second consecutive session of fresh closing highs since early May.
On a weekly basis, U.S. crude is on track to rise for a third consecutive week after two straight weekly declines, while Brent is on track for a fifth consecutive weekly gain. Brent's cumulative gain this year has exceeded 85%, and the supply risk premium triggered by the Middle East conflict remains an important force supporting oil prices.
Therefore, the market will need to focus on whether the Middle East conflict further affects key oil-producing facilities and transport routes, whether crude oil exports through the Strait of Hormuz can maintain their recovery momentum, and whether the tight supply of refined products such as diesel continues to worsen. If expectations that the conflict will become prolonged strengthen further, supply concerns may continue to support oil prices; conversely, if actual supply remains resilient and the situation does not escalate further, the geopolitical risk premium accumulated earlier may also recede.
Middle East conflict risks spill over, Saudi energy facilities and transport routes under pressure
The primary factor driving oil prices higher is the rising risk that the Middle East conflict spreads to major oil-producing countries and energy transport routes.
Media reports noted that Yemen's Houthi armed group has recently intensified attacks on Saudi Arabia. According to reports, Saudi Aramco on Thursday asked employees to evacuate its headquarters in Dhahran in the east and arranged for employees to work remotely. At the same time, the Houthis claimed to have recently attacked a Saudi Red Sea port and announced attacks targeting Saudi oil facilities and airports.
These developments have heightened market concerns about the security of Saudi Arabia's energy infrastructure and export routes. Saudi Arabia is a major global oil producer, and any substantial disruption to its oil production, transport, or exports could quickly transmit to the international crude oil market.
The risks also involve the Strait of Hormuz and surrounding maritime routes. The conflict between the United States and Iran continues, and the two sides' standoff over maritime transport and blockade measures has not been eliminated; if the conflict escalates further, crude oil transport could face new disruptions.
U.S. President Trump on Thursday again threatened further action against Iran. According to Xinhua News Agency, citing a report by The New York Times on the 21st, the U.S. and Israeli militaries have drawn up specific plans to strike Iran again after the U.S. congressional midterm elections in November, though it remains uncertain whether Trump will approve the implementation of such a plan.
Although the above plan does not mean military action has already occurred, it has intensified market concerns that the conflict will become prolonged and that supply risks will expand further.
It is worth noting that Saudi Arabia has already shifted some crude oil transport away from the Persian Gulf to the Red Sea coast port of Yanbu through the East-West Pipeline in order to bypass the Strait of Hormuz. Saudi Aramco CEO Amin Nasser said on Thursday that the pipeline's throughput has increased from about 2 million barrels per day to about 7 million barrels per day. However, the Red Sea direction also faces the threat of Houthi attacks, and bypass capability cannot completely eliminate supply risks.
Short covering before the weekend, options hedging buying amplifies the rally
In addition to geopolitical risks, trading-side forces are also helping drive oil prices higher.
CIBC Private Wealth Group senior energy trader Rebecca Babin believes that as oil prices rise, the market is showing an obvious "negative Gamma" hedging effect.
Simply put, some options market makers, after selling call options, may face the risk of needing to adjust hedging positions as prices change. When oil prices continue to rise, these market makers may need to buy more crude oil futures to hedge their own risk exposure. As prices move further higher, hedging purchases may increase again, creating a positive feedback loop that amplifies the rally.
Babin said a large number of bullish call spread trades have left market makers in a negative Gamma state. This dynamic began to have a noticeable impact when oil prices rose to around $110, and the buying operations by market makers to hedge exposure appear to have amplified the market rally.
At the same time, position adjustments before the weekend may also provide additional support for oil prices. Because the crude oil futures market is closed during the weekend, if the Middle East situation suddenly escalates, investors cannot adjust positions in a timely manner through regular trading, so some traders choose to cover short positions in advance or reduce bearish exposure.
This means that the current oil price increase is not entirely driven by newly realized actual supply losses. Part of the gain also comes from the market pricing in future risks in advance and from the amplification of price volatility by derivatives trading.
However, such trading factors are also two-way. Once there is no new escalation of conflict over the weekend, or if the market begins to lower expectations for supply disruptions, long positions accumulated earlier may also trigger profit-taking.
United States prepares for long-term standoff with Iran, oil prices still face upside risks in the short term
Looking ahead, the risk of a prolonged Middle East conflict remains an important factor supporting oil prices. The latest remarks by U.S. Ambassador to the United Nations Michael Waltz show that the U.S. government is prepared for a long-term standoff with Iran, and the duration of the conflict may far exceed Trump's original expectations.
According to Xinhua News Agency, citing an exclusive interview published by the UK's Financial Times on the 23rd, Waltz said the United States is prepared for a long-term standoff with Iran, and the two sides may still be in a stalemate a year later. By then, the United States and Iran may still not have reached an agreement on Iran's nuclear program, and shipping through the Strait of Hormuz may also fail to return to pre-conflict levels. Waltz hopes Iran can "come to the negotiating table" before such a situation occurs.
This statement stands in sharp contrast to Trump's initial judgment on the duration of military action. Xinhua noted that Trump initially said military action against Iran would last "four to five weeks," but the conflict has still not ended. As the conflict continues, fuel prices remain high, supplies of fertilizer and other commodities are short, and energy facilities and export routes in the Gulf region have also suffered severe damage.
Waltz also said the Trump administration is further increasing economic pressure on Iran. He said President Trump and the U.S. Navy have the ability to maintain a blockade of Iranian ports for the foreseeable future. According to him, only by disposing of Iran's highly enriched uranium and reaching a substantive agreement with Iran on uranium enrichment activities within its territory can the United States' strategic objectives in this conflict be considered achieved.
At the same time, according to Xinhua News Agency, citing The New York Times, the U.S. and Israeli militaries have drawn up specific plans to strike Iran again after the U.S. congressional midterm elections in November, though it remains uncertain whether Trump will approve the implementation of such a plan.
For the crude oil market, this means supply risks may persist for a longer time. Even if there is no new major supply disruption in the short term, as long as the market believes uncertainty remains over the recovery of shipping through the Strait of Hormuz, crude oil prices may continue to include a relatively high geopolitical risk premium. If the conflict escalates further and key energy facilities or transport routes are hit anew, oil prices may still be boosted.
However, further oil price gains also face constraints. If crude oil transport through the Strait of Hormuz continues to recover, the actual degree of supply tightness may be lower than futures market expectations; persistently high freight rates and energy costs may also squeeze refinery margins and limit crude oil processing demand. Excessive oil price gains may also dampen consumption and intensify cost pressures facing the global economy.
Crude oil futures and physical market diverge, supply recovery remains a key variable
Although geopolitical risks continue to push futures prices higher, Middle East crude oil supply has not always been deteriorating.
Bloomberg, citing Morgan Stanley data, reported that Middle East crude oil export volumes have recovered to close to pre-war levels. Crude oil transport through the Strait of Hormuz has recently recovered somewhat, putting certain pressure on the physical market, with physical crude prices weakening, in contrast to the continued rise in futures prices.
This divergence reflects two different market logics: futures traders are more focused on the possibility of future supply disruptions, while the physical market more directly reflects the currently available volume of crude oil, transport costs, and refinery procurement demand.
Transport cost is one key variable.
TD Securities senior commodity strategist Ryan McKay said that in addition to the risk of Middle East conflict escalation, freight rates are becoming an important marginal factor affecting oil prices. Higher landed costs may squeeze refinery margins, thereby limiting refinery throughput and placing some restraint on crude oil price gains.
But at the same time, high crude oil transport costs and blocked supply chains may also keep refined product markets such as diesel tight.
Therefore, the current market is not simply facing insufficient crude oil supply, but a structural contradiction among crude oil transport, refining and processing, and refined product supply. Even if crude oil exports gradually recover, as long as transport costs remain high and refined product supply remains constrained, energy price pressures may not ease in tandem.
Diesel supply tightness intensifies energy pressure, United States taps strategic oil reserves again
The impact of rising crude oil prices has already extended to the refined products market, with diesel supply particularly noteworthy.
Bloomberg pointed out that refined product prices have risen even more than crude oil this year, with diesel especially obvious. Refined product transport in the Middle East remains restricted, and Ukraine's continued attacks on Russian refining facilities have further intensified global refined product supply pressure.
Against this backdrop, governments in multiple countries have begun tapping inventories to ease tight energy supply conditions.
The U.S. Department of Energy announced on Friday that it authorized an emergency exchange of up to 400,000 barrels of Strategic Petroleum Reserve (SPR) crude oil to respond to a crude oil supply disruption at the Lake Charles refinery in Louisiana. The refinery is operated by Phillips 66 and has a daily processing capacity of about 264,000 barrels. The Department of Energy said the exchange will help fill a temporary crude oil delivery gap and maintain production and supply of transportation fuels in Louisiana and surrounding areas.
This arrangement is not a direct sale of inventory, but rather a method of lending crude oil and later returning it with an additional premium of crude oil. The U.S. Department of Energy said Phillips 66 will return the borrowed crude oil and additionally return premium crude oil to help replenish the strategic reserve.
However, the scale of this emergency exchange is limited, mainly targeting a supply disruption at a specific refinery, and is not equivalent to a new round of large-scale reserve releases by the United States aimed at lowering overall oil prices.
More noteworthy is that the U.S. Strategic Petroleum Reserve has fallen to its lowest level since 1982. Previously, the U.S. government tapped inventories due to supply chain disruptions caused by the Iran war, and the Biden administration had also released reserves after the Russia-Ukraine conflict. A reduced inventory buffer means that if a larger supply disruption occurs in the future, the strategic resources available to the United States to quickly fill the gap will be limited.
At the same time, the Trump administration is still seeking other ways to ease domestic fuel price pressure, including promoting a diesel supply arrangement with Russia.
Continued gains in crude oil prices may further raise the costs of gasoline, diesel, jet fuel, and other products, and transmit through transportation, logistics, and industrial production to a broader range of commodity prices. If energy price increases persist for a longer period, inflationary pressure may also re-emerge, leaving central banks facing a more complex trade-off between controlling prices and supporting economic growth.
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