Oil prices continued their upward trajectory on Tuesday, maintaining a strong performance following a surge in the previous session. The unexpected escalation of geopolitical tensions has driven prices higher rapidly, exceeding the expectations of many market participants.
With the Strait of Hormuz once again effectively blocked from both sides by the United States and Iran, shipping traffic through the critical waterway has plummeted. The uncertainty surrounding when the Strait might reopen has reintroduced supply tightness as a key consideration for investors. This heightened concern is reflected in the rapid strengthening of crude oil time spreads and resilient product crack spreads.
The United States conducted strikes against Iran for the fourth consecutive day. Rezaei, a military advisor to Iran's Supreme Leader Khamenei, stated that "the Iran-US memorandum of understanding no longer exists, and the enemy has officially entered a state of war." Markets are closely monitoring the risks of an escalating geopolitical standoff. Regarding control over the Strait of Hormuz, Oman, positioned between the US and Iran, has stated it will continue to fully fulfill its obligations as a party to the UN Convention on the Law of the Sea and maintain transparent and neutral cooperation with all parties to restore freedom of navigation. US Energy Secretary Wright stated that no transit fees will be charged for the Strait of Hormuz, abandoning the previous consideration of a 20% fee, and emphasized the need to ensure oil can flow from the Arabian Gulf. Iran, in turn, has stated that under a state of war, it will assume complete management of the Strait and will defend its sovereignty there at any cost. The Iranian Revolutionary Guard has indicated that as long as US actions continue, the reopening of the Strait of Hormuz will be delayed.
Although military friction has clearly intensified, with both sides reintroducing blockade measures, the geopolitical contest over the Strait has escalated without spiraling out of control. Consequently, after rallying during the day, oil prices entered a tug-of-war at elevated levels in the overnight session, encountering emerging resistance. The potential for further gains and the trajectory of the rebound will hinge on developments in the geopolitical situation. Caution is advised when considering new long positions at current levels. Market participants should focus on timing and participate cautiously.
Daily Market Movements
WTI crude oil futures rose by $1.20, or 1.54%, to settle at $79.34 per barrel. Brent crude oil futures gained $1.43, or 1.72%, to settle at $84.73 per barrel. INE crude oil futures increased by 2.82%, closing at 511.3 yuan.
The US dollar index fell by 0.37% to 100.93. The USD/CNH rate on the Hong Kong Exchange dipped 0.01% to 6.7513. The US 10-year Treasury yield rose by 0.24% to 108.91. The Dow Jones Industrial Average gained 0.02%, closing at 52,508.27.
Key Recent Developments
Russian Refining Capacity Severely Impacted, Daily Run Rate Hits Multi-Year Low
Ongoing Ukrainian drone attacks continue to batter Russia's refining sector, pushing the country's daily refining volume down to approximately 3.8 million barrels, its lowest level in 21 years. This highlights the escalating disruptive impact of the conflict on energy supply chains.
As of mid-July, idled or affected capacity stands at roughly 4.3 million barrels per day, representing nearly 60% of Russia's total refining capacity. Actual offline processing capacity is estimated to be between 1.5 and 2 million barrels per day.
The combination of persistent attacks and scheduled refinery maintenance work severely limits the potential for a recovery in utilization rates. Analysts expect Russia's refining run rates to remain subdued in the third quarter, with only marginal improvements possible.
As some maintenance activities wind down, August run rates could see a modest rebound to around 4.3 million barrels per day. However, the continued threat of drone attacks presents a significant downside risk to capacity recovery, leaving the subsequent trend highly uncertain.
Middle East Benchmark Crude Swings to Premium, Strait of Hormuz Insurance Costs May Be Repriced
On Tuesday, key Middle Eastern crude benchmarks including Oman, Dubai, and Murban swung sharply from a discount into a premium structure. The market returned to a backwardation (where near-term prices are higher than forward prices) for the first time in about a month, directly reflecting the expected squeeze on immediate supply due to heightened geopolitical risks in the Strait of Hormuz.
Missile attacks by Iran on two tankers linked to Abu Dhabi National Oil Company directly threaten transshipment operations along the coasts of the UAE and Oman. Trade and shipping sources indicate the latest developments may make shipowners cautious about entering the Gulf to load crude. Chartered vessels are closely monitoring the situation, while refineries are beginning to worry about the timely delivery of contracted cargoes in the coming weeks.
The spot trading window was active, with the premium for cash Dubai over swap contracts surging by $2.74 per barrel to $1.52. A transaction where Vitol sold a September-loading Oman crude cargo to Trafigura showed a significantly narrowed bid-ask spread, indicating traders are paying a higher premium for potential disruption risks.
From a trading psychology perspective, previously accumulated short positions were forced to cover following the sudden geopolitical shock. Concerns over global trade friction stemming from tariff-related rhetoric and plans for Strait transit fees are creating a policy overlay effect. The focus now shifts to whether the US-Iran military standoff escalates further towards a blockade threshold and whether Asian refineries activate emergency procurement plans to hedge against supply chain disruption risks.
Asian Middle Distillate Crack Spreads Hit Three-Month High, Diesel and Jet Fuel Backwardation Widens
The Asian diesel and jet fuel markets maintained their strength on Tuesday, with both the time spreads and crack spreads for the two fuels climbing to near two-month highs. The benchmark 10ppm diesel crack profit extended its gains in the afternoon session, settling near $65 per barrel, a three-month peak. The spot premium also strengthened to around $4.7 per barrel, a one-month high.
The spot premium for jet fuel was also notable. Last week, at least two Northeast Asian refineries secured August-loading spot cargoes at premium prices, pushing the diesel-jet fuel spread indicator into a premium range of about $5 per barrel for the first time since early May. This reflects the relative strength of August jet fuel swap contracts compared to diesel.
On the supply-demand front, some refineries are still marketing export cargoes for the second half of August. China's export outlook for August remains uncertain. While exports are expected to continue for the remainder of July, if current strong Asian prices persist, some traders may redirect cargoes originally destined for the West back to the region, altering inter-regional arbitrage flows.
Geopolitical risk premiums continue to be injected into the market. Missile attacks on two UAE tankers in the Strait of Hormuz causing casualties, coupled with a 27% month-on-month plunge in Russia's June seaborne product exports to 5.7 million tonnes due to refinery attacks, are providing additional support to crack spreads. However, traders remain cautious about East-West arbitrage windows, with limited activity in the spot trading window. Subsequent US inventory data will be closely watched.
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