The market on Tuesday once again proved to be dizzying, with a sharp unilateral decline that saw WTI break below the $90 mark, briefly falling close to $85 at its lowest point. Over two trading sessions, oil prices tumbled more than 10% from their recent highs. The shift occurred early Wednesday morning. Following former President Trump's statement that the US would respond to an American military drone reportedly being shot down by Iran, oil prices surged instantly.
This week's volatility in the crude market has significantly amplified, with geopolitical factors being the primary driver. Numerous uncertainties remain in the near term. Concurrently, shifts in supply and demand fundamentals are generating negative feedback for the oil market. It is highly likely that prices will continue to exhibit high volatility with significant swings in the coming period.
On Tuesday, China's domestic commodity market experienced a broad sell-off, with the correction intensifying. In this bearish sentiment, crude oil was no exception, continuing its decline from Monday's session during Asian trading hours. Beyond the cooling geopolitical tensions leading to a retraction of risk premiums, weak demand is also starting to weigh on prices. The premiums for various crude grades in global physical markets are receding.
Data released by China's General Administration of Customs showed that the country's crude oil imports in May fell sharply to 33.081 million tonnes, or 7.8 million barrels per day. This represents a month-on-month decrease of 14% and a year-on-year plunge of 29%, significantly lower than the 46.6 million tonnes imported in May 2025. The reduction in Chinese import buying has mitigated the impact of supply shortages, leading to a lack of buyers in the spot market and weaker prices.
Saudi Aramco has lowered the official selling price for its Arab Light crude bound for Asia next month by $6 per barrel. The high oil prices resulting from the US-Iran conflict have accelerated the transition to new energy sources. In China, the share of new energy vehicle sales has exceeded 60% for two consecutive months. Furthermore, the suppression of refined product demand due to high oil prices has exceeded expectations.
In its June Short-Term Energy Outlook released early Wednesday, the U.S. Energy Information Administration slightly revised down its global demand forecast. These changes on the demand side have sparked market concerns, becoming another significant factor, alongside the US-Iran negotiations, that is capping oil price performance. This has also alleviated some of the anxiety caused by the ongoing global crude inventory drawdown over the past period.
However, the substantial decline in crude oil market inventories continues. The API inventory report showed U.S. crude stocks fell by a larger-than-expected 9.119 million barrels. The EIA predicts the Strait of Hormuz may not reopen until the third quarter, with production disruptions in parts of the Middle East expected to persist until the end of 2027, beyond the scope of the short-term outlook.
Global crude inventories are expected to continue depleting significantly, with OECD commercial oil stocks projected to fall to their lowest level since 2003. Investors need to weigh which factor—supply or demand—will dominate oil price movements. Many institutions, including ours, have noted the underlying concern of rapidly declining crude inventories. However, capital does not currently appear to be speculating on this inventory drawdown risk. Nevertheless, this factor's potential impact is accumulating and remains a point requiring high vigilance.
Regarding the progress of the US-Iran agreement, Trump stated in an interview that peace agreement negotiations with Iran have entered the final stage and are expected to be signed within two or three days. However, with the US launching strikes on Iran again following the drone incident, the agreement's finalization faces further delay.
Vice President Vance's perspective is relatively more objective. He stated the agreement could be reached within the next week or could take months, but it will "absolutely" be concluded before the November midterm elections. According to foreign media statistics, Trump has claimed an Iran deal is "imminent" 37 times, yet no agreement has been reached to date.
The market remains sensitive to the theme that the US and Iran will eventually reach a deal. During Tuesday's night session, oil prices still experienced a brief sharp drop influenced by this news. Investors are forced to maintain a wait-and-see stance until the outcome is clear, making this a useful tool for Trump to pressure oil prices.
The current situation facing the crude oil market is complex. On one hand, the back-and-forth negotiations between the US and Iran over a memorandum of understanding, without a breakthrough, force investors to patiently await a resolution, with risks of geopolitical escalation still present. On the other hand, Iran firmly maintains control over the Strait of Hormuz, and the specifics of navigation through the strait require further time to clarify.
The continued drawdown in crude market inventories is a certain direction. Demand is being suppressed by high oil prices while also entering the traditional peak consumption season, requiring further observation of demand-side performance. The EIA has slightly raised its oil price forecast. Overall, with prices having retreated to around $90, the room for further sharp declines in the short term is relatively limited.
If US-Iran negotiations face setbacks, oil prices still have a high probability of rebounding. The basic strategy of looking for buying opportunities on dips is maintained. During this high-volatility phase, attention to timing and cautious participation are advised.
Daily Market Movements
WTI crude oil futures fell $3.1, or 3.4%, to settle at $88.2 per barrel. Brent crude oil futures fell $2.8, or 2.97%, to settle at $91.45 per barrel. INE crude oil futures fell 2.11% to settle at 575 yuan.
The U.S. Dollar Index fell 0.06% to 99.95. The Hong Kong Exchange USD/CNY rate fell 0.22% to 6.769. The U.S. 10-Year Treasury yield rose 0.27% to 109.27. The Dow Jones Industrial Average rose 0.17% to 50,872.11.
Key Recent Developments
The premiums for Middle Eastern crude benchmarks Oman, Dubai, and Murban weakened on Tuesday as crude futures prices fell and demand remained sluggish. Following Trump's call, Iran and Israel announced a suspension of mutual attacks, leading oil to give back most of the previous session's gains, though both sides warned hostilities could resume.
The spot Dubai swap spread fell 81 cents to $5.62 per barrel. The Oman-Dubai spread was $4.91, compared to $6.24 the previous session. Russia plans to increase refinery run rates in June to address impending fuel shortages, which will reduce crude exports. Meanwhile, a tanker previously thought to be carrying Iranian crude to the Philippines was actually loaded with Russian crude, according to revised data from ship-tracking companies.
U.S. Vice President Vance stated on Tuesday that the peace deal being reached between Washington and Tehran is a "big success" for the American people, whether Israel likes it or not. Vance acknowledged the U.S. and Israel "have many shared interests, but also situations where interests diverge." He said, "I think the President has been very clear here that while Israel obviously has some of its own objectives, America's primary objective with Iran is to ensure Iran does not obtain a nuclear weapon."
He claimed that since Trump's return to the White House, the administration has "created the space" for a nuclear deal superior to the one reached by former President Obama in 2015. He added, "Over the past year and a half, we have created the necessary conditions for a long-term solution to the Iran nuclear deal. Now, Israel may like this, or may not like it, but fundamentally, we believe it is in America's best interest."
Former President Trump said on the 9th that negotiations with Iran have entered the "final stage" and an agreement will be reached in "two to three days." Speaking to reporters at New York's Kennedy Airport, Trump said Israel and Iran, which had been "going back and forth," have now "agreed to a ceasefire," adding, "We are in the final stage, and we will have a very, very good agreement." When asked how long the negotiations would take, Trump replied, "Two to three days."
The U.S. Energy Information Administration (EIA) issued its latest Short-Term Energy Outlook report, delivering a stern warning for the global oil market. Due to significant Middle East production disruptions triggered by the Iran conflict, oil inventories in OECD member countries are rapidly depleting, approaching their lowest level since 2003. This starkly highlights the fragility of global energy supply and underpins the market expectation for sustained high oil prices through 2026.
EIA data indicates that, under the core assumption that shipping traffic through the Strait of Hormuz will not recover to pre-conflict levels until early 2027, total OECD petroleum inventories are projected to fall below 2.3 billion barrels by December 2026, hitting a record low since data began in 2003. This figure is significantly lower than the previous five-year average of 2.8 billion barrels, representing a substantial inventory deficit.
From a supply security perspective, OECD oil inventories at that point would only cover about 50 days of future global demand, also the worst level since 2003. The persistent rapid inventory drawdown means the global oil market has lost its ample buffer, significantly weakening its resilience to geopolitical risks.
The core trigger for this oil market turmoil was the Iran conflict that erupted in late February 2026 and its impact on the Strait of Hormuz, a global energy chokepoint. As a key global shipping lane, the Strait of Hormuz typically handles about 20% of global seaborne oil trade, along with significant LNG shipments, serving as the primary conduit for Middle Eastern oil exports to the world.
Following the conflict's outbreak, restricted shipping passage through the strait directly caused a loss of over 11 million barrels per day in Middle Eastern oil production, affecting exports from major producers like Saudi Arabia, the UAE, Iraq, Kuwait, Qatar, and Iran. To fill this massive supply gap, the global market has been forced to draw down existing inventories. Global petroleum inventories were drawn down at an average rate of 8.5 million barrels per day in the second quarter, with a high drawdown rate of 7.6 million barrels per day expected to continue into the third quarter.
While the market recently saw a price correction on rumors of a US-Iran reconciliation, the EIA clearly warns of the risk: as the relevant agreement has not yet been finalized, most Middle Eastern oil production remains halted, strait traffic remains restricted, and the global inventory drawdown trend has not ceased.
It is noteworthy that the Strait of Hormuz is directly linked to the energy security of major Asian economies like China, India, Japan, and South Korea. The shipping disruption has already caused fuel shortages and rationing in some Asian regions, while forcing a restructuring of global energy supply chains. Countries are responding by releasing strategic petroleum reserves, developing pipeline transport, and sourcing non-Gulf crude to hedge risks.
Due to extreme short-term supply tightness, the global oil market in 2026 is exhibiting a unique price structure where spot prices are significantly higher than futures. The EIA predicts the Brent crude spot price average for June-July will reach $105 per barrel, forming a significant premium over the futures price of $91.60 for the same period, directly reflecting strong market concern over short-term energy supply shortages.
Institutional analysis suggests that oil prices will remain elevated until Strait of Hormuz shipping recovers and global oil inventories are replenished. In the long term, as supply gradually recovers by 2027, prices are expected to fall back to around $79 per barrel. However, a high-price environment for the remainder of 2026 is almost certain, with little possibility of a reversal.
Historically, energy disruptions caused by geopolitics often trigger sharp oil price volatility. This crisis, combined with already low global crude inventories, has amplified the price increase effect. Even with the cushioning effects of strategic reserve releases and demand adjustments, ultra-low inventories have created a strong "floor" for prices, significantly reducing the room for a market correction.
This EIA report also signals a key market turning point: global oil demand in 2026 is projected to decrease by 1.1 million barrels per day. This marks the first annual contraction in global oil demand since the impact of the COVID-19 pandemic in 2020, completely overturning the previous optimistic forecast of a 200,000 barrel-per-day increase.
The core drivers of the demand decline are high oil prices, fuel supply shortages, and energy conservation policies implemented by various countries. From a market perspective, consumers are cutting non-essential travel due to higher prices for gasoline, diesel, and jet fuel. Businesses are actively optimizing logistics and switching to alternative energy to reduce oil costs. Many governments are compressing oil consumption through energy-saving incentives, traffic restrictions, and energy rationing policies. Demand decline is most pronounced in developed OECD countries. While emerging economies show stronger demand resilience, they are also pressured by imported inflation.
The EIA also predicts that with the recovery of global energy supply in 2027, oil demand will rebound, with an expected increase of 1.5 to 2.5 million barrels per day, bringing total demand back to 105.3-105.6 million barrels per day. However, the demand contraction in 2026 will directly hinder the development of core industries like aviation, logistics, and petrochemicals, suppressing global economic growth. Moreover, the weak demand trend has already spread from Asia and the Middle East to the rest of the world.
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