Market Review: As of May 29, the main WTI crude oil futures contract settled at $87.36 per barrel, marking a monthly decline of 16.86%. The main Brent crude oil futures contract settled at $92.05 per barrel, down 19.26% for the month. The main INE crude oil futures contract settled at 563.8 yuan per barrel, posting a monthly loss of 15.37%.
The buffering effect of floating storage is weakening, with global inventory levels continuing to decline. By the end of May, oil prices had experienced a significant drop. Throughout May, our weekly reports centered on three main viewpoints: 1) The global floating storage buffer is disappearing, leading to a rapid drawdown in global inventories. 2) Following high-level talks, the U.S. and Iran are expected to accelerate efforts to end the conflict, leading to wider downward price volatility. 3) Due to persistent global supply disruptions, even if a U.S.-Iran agreement is reached, the price floor is likely to rise over time. All three points materialized in May. By the end of the month, global floating storage stood at 145 million barrels, while onshore petroleum inventories were 3.564 billion barrels, having quickly fallen from seasonal highs to near the average levels of recent years. Entering June, WTI crude is expected to find strong support around the $80 per barrel level.
U.S.-Iran Tensions See a Glimmer of Hope, Strait Transit Expectations Revised Upward. After high-level talks, the U.S. President once again extended the ceasefire agreement and signed a memorandum of understanding with Iran. However, significant differences remain between the two sides regarding a final peace deal, primarily concerning control of the Strait of Hormuz and handling the nuclear issue. Iran, currently facing severe disruption to shipments through the Strait, is experiencing major impacts on its oil revenues, with storage capacity at Kharg Island at critically high levels. This creates an incentive for Iran to seek a swift end to the conflict. For the U.S., motivations to quickly resolve the war and lower oil prices include curbing inflation and preparing for the upcoming peak summer driving season, which would reduce costs for consumers. As we move into June, there is potential for the U.S. and Iran to reach a relatively suitable solution regarding uranium enrichment and Strait transit. Military pressure from the U.S. cannot be ruled out during this period. Crude oil prices are expected to maintain high volatility in June. Chasing the downside at current levels is not advised. Instead, one might consider buying on dips if WTI falls to around $80 per barrel following more significant negative news from U.S.-Iran developments or participate in the market using option structures.
Outlook: Key factors to watch include: 1) Strait transit conditions; 2) Progress in U.S.-Iran negotiations; 3) Potential escalation of energy-targeted strikes between Russia and Ukraine; 4) Changes in storage capacity utilization within the Gulf; 5) The potential chain reaction of negative news if the UAE announces substantial production increases after Strait transit resumes; 6) Military pressure from the U.S. and Israel.
I. Market Review Geopolitical tensions eased in May, leading to a fluctuating decline in international oil prices. The month's price action can be divided into two phases. In the first phase (May 1-15), the U.S. President repeatedly expressed dissatisfaction with Iran's proposed negotiation terms. For instance, on May 11, he stated, "I just read Iran's response. I don't like it. Completely unacceptable!" While no major escalatory events occurred, negotiations appeared stalled with significant differences and unwillingness to compromise from both sides. Concurrently, as noted in our weekly reports before the high-level talks, "Geopolitics will remain relatively stable before the talks, but persistent crude oil supply shortages will lift the price floor." In early May, various reports highlighted the substantial losses in global crude supply. The EIA monthly report also revised upward its estimates for potential supply deficits in the near term, projecting global crude shortages of 9 million, 7.78 million, and 6.3 million barrels per day for May through July, respectively. Despite relative geopolitical calm in the first half of the month, the market began pricing in the severity of the fundamental situation, pushing prices higher.
In the second phase (May 16-31), following the high-level talks, our reports noted "the possibility of accelerated U.S.-Iran progress." We believe the U.S. has several motivations: 1) Ending the war with Iran quickly to declare "victory," followed by a swift campaign against Cuba, could bolster the administration's position ahead of midterm elections, potentially securing Senate seats and avoiding losing control of both chambers, which would hinder future governance. 2) With the peak summer driving season approaching, there is significant demand for travel, creating an incentive to lower oil prices before the peak to reduce costs for voters. 3) The policy focus of the current Federal Reserve leadership is "interest rate cuts, balance sheet reduction, and increasing Fed independence." Maintaining high oil prices that keep inflation elevated would make it difficult for the Fed to implement rate cuts, and high rates are not beneficial for managing the substantial U.S. debt.
For Iran, despite high self-sufficiency in energy and food, oil revenues remain crucial for its military and government. Since the U.S. Navy imposed a dual blockade on the Strait of Hormuz and increased floating storage inspections on April 13, shipments from Iran's Gulf have nearly stalled. This shipping halt has forced significant production cuts at Iranian oil fields and led to a surge in storage capacity utilization. Consequently, market concerns grew that both sides have incentives for a ceasefire, especially after Iran's foreign envoy visited Eastern nations ahead of the U.S. This quickly fueled expectations of a U.S.-Iran détente. Additionally, the memorandum of understanding proposed in May is the most detailed and pragmatic negotiation agreement since talks began. Oil prices fell sharply in the latter half of the month, and the crude oil calendar spread widened upward due to reduced geopolitical risk premium.
II. U.S. Crude Inventories Continue to Draw, Exports Remain Elevated As of the end of May, U.S. crude oil production held steady at 13.715 million barrels per day, showing a slight increase from April. Production is expected to rise in the coming weeks as output from the Pikka Phase 1 project, operated by Santos on Alaska's North Slope, gradually increases, projected to reach 80,000 barrels per day by the third quarter. Furthermore, sustained high oil prices are encouraging U.S. operators to intensify onshore exploration and development. The U.S. Baker Hughes rig count and the number of active fracking fleets have increased noticeably compared to April. In April, the industry may have viewed the U.S.-Iran conflict as a short-term factor for high prices, with producers preferring to hedge at highs rather than increase output. However, with the persistence of high prices, the Permian Basin has seen a sudden, significant rise in platforms classified by Baker Hughes as directional drilling rigs, with the count surging by 11 to 30. This indicates producers are actively seeking to boost production.
U.S. crude oil net exports briefly turned positive at the end of April but did not sustain that status. However, due to tight physical supplies globally, purchases of U.S. crude increased, keeping overall export volumes at elevated levels throughout May. In the final week of May, crude oil exports reached 4.44 million barrels per day.
From an inventory perspective, according to the latest EIA data for the week ending May 27, U.S. commercial crude oil inventories stood at 441 million barrels, showing a significant decline from April. This drawdown is primarily due to persistently strong exports, stable production, and resilient apparent demand. As the U.S. continues to release oil from its Strategic Petroleum Reserve (SPR), the SPR level fell to 365 million barrels, a notable decrease from April. The total SPR release since April amounts to approximately 50 million barrels.
A key difference between OPEC's latest May Monthly Oil Market Report and the April report is a substantial downward revision to global oil demand. The April report projected global oil demand to increase by 1.4 million barrels per day year-on-year this year. However, the May report forecasts a decline of 420,000 barrels per day year-on-year, to 104 million barrels per day. The largest quarterly drop is projected for Q2 2026, at 2.45 million barrels per day, comprising a 930,000 bpd decrease in OECD countries and a 1.5 million bpd decrease in non-OECD countries.
On the supply side, OPEC notes that global oil supply fell by a further 1.8 million barrels per day in April to 95.1 million barrels per day. The cumulative decline since February has reached 12.8 million barrels per day. Production from Gulf countries affected by the closure of the Strait of Hormuz is 14.4 million barrels per day below pre-conflict levels. Some relief has come from increased production and exports from Atlantic Basin countries. Assuming Strait flows gradually resume from June, OPEC expects global oil supply to average 102.2 million barrels per day in 2026, a decline of 3.9 million barrels per day, reflecting a more pessimistic outlook in this month's report due to the U.S.-Iran war.
Regarding inventories, OPEC states that global crude inventories fell by 129 million barrels in March and decreased by a further 117 million barrels in April. Due to continued disruption to maritime trade through the Strait of Hormuz, onshore inventories fell by 170 million barrels (a daily draw of 5.7 million barrels) in April, while seaborne crude inventories increased by 53 million barrels. Onshore inventories in OECD countries fell sharply by 146 million barrels (a daily draw of 4.9 million barrels), while visible inventories in non-OECD countries decreased by 24 million barrels. It should be noted that OPEC's monthly report data is relatively lagged. According to Kpler data, global onshore inventories stood at 3.564 billion barrels at the end of May, down another 79 million barrels from April, having fallen to near average levels for this time of year.
III. Strait of Hormuz Floating Storage Buffer Weakens, Global Inventory Levels Keep Falling Global petroleum inventories have shown a clear decline. By the end of May, global onshore petroleum inventories were recorded at 3.564 billion barrels, a drawdown of 117 million barrels from 3.687 billion barrels in April. While global onshore petroleum inventories at 3.543 billion barrels still offer some buffer in absolute terms, if shipments from within the Gulf remain severely disrupted, Middle Eastern inventories lose their reference value. Subtracting Middle Eastern onshore petroleum inventories, the current global onshore petroleum inventory stands at 3.292 billion barrels. The inventory situation is gradually becoming more critical, evident in two main aspects. First, the speed of the drawdown: When the U.S. declared war on Venezuela in January, it implicitly suggested Iran could be the next target. This prompted global buyers to increase purchases from the Gulf in February. Considering that this year was initially projected to be one of significant global crude surplus, with the market in a state of extreme oversupply at the start of the year, it is notable that crude inventories have fallen from highs to near seasonal averages in just three months. Second, while absolute inventory levels remain high, China has contributed significantly to this figure. China consistently increased crude purchases during the low-price environment of 2025, becoming a major force in balancing international crude demand that year, leading to high overall inventory levels. However, clear structural divergence has emerged globally, with countries like Japan, South Korea, and Australia experiencing different conditions. The high absolute level of global inventories does not fully reflect the situation across all consuming nations. Even subtracting Middle Eastern inventories, the current inventory level is well below the global seasonal average. Overall, the substantial floating storage built up globally at the start of the year is being gradually depleted, and global inventory levels continue to trend downward.
IV. U.S.-Iran Tensions Ease Slightly, Strait Transit Expectations Revised Upward The Strait of Hormuz remains in a critical observation period. The U.S.-Iran conflict, which began officially on February 28, has now lasted three months. Crude shipment flows from within the Gulf have seen only sporadic increases on a few specific days, with transit volumes for most of the time firmly below 10 energy vessels per day. Although a memorandum of understanding was signed at the end of April, with both sides expressing intent to resolve transit issues within 30 days, significant differences remain regarding "Strait transit jurisdiction and nuclear issues," compounded by renewed hostilities between Israel and Lebanon. Whether transit flows can recover in June remains highly uncertain. Through the end of May, daily transit flows remained below 10 energy vessels. In the final week of May, only 16 energy vessels transited the Strait in total, primarily from the UAE and Iran. Despite the ongoing dual blockade within the Gulf, market expectations for Strait reopening have improved. According to the latest report from Iran's Tasnim News Agency, "The Islamic Revolutionary Guard Corps Navy announced that in the past 24 hours, 28 vessels, including tankers, container ships, and other merchant vessels, passed through the Strait of Hormuz with permission, coordinated and safeguarded by the Iranian Navy." If the U.S. and Iran can prioritize resolving transit issues in June, leading to a recovery in energy vessel flows, the global crude supply-demand gap would see some correction.
Based on the current pace, both the U.S. and Iran show an inclination to end the war, but reaching a final agreement still faces certain disagreements and obstacles. Therefore, a phased solution to completely end the conflict cannot be ruled out, with the transit issue potentially being the first challenge addressed in June. However, even if the U.S. and Iran reach a limited agreement in June and gradually resume Strait of Hormuz transit starting from mid-July, supply recovery is expected to follow an S-shaped curve rather than a rapid rebound. Cumulative losses by year-end could approach 2 billion barrels.
Looking at shipment activity from Middle Eastern oil producers, ports like Saudi Arabia's Yanbu and the UAE's Fujairah have maintained relatively smooth oil shipments. In April, they recorded shipment volumes of 1.816 million barrels per day (Fujairah) and 3.769 million barrels per day (Yanbu), respectively, totaling approximately 5.585 million barrels per day. However, following the formal U.S. announcement of the Strait blockade on April 13, shipments from Iran's Kharg Island have continued to decline. Throughout May, Kharg Island crude shipments averaged a low 222,400 barrels per day, even hitting zero shipments in weeks 20 and 22. Compared to April, a slightly positive development in May was a reduced probability of Iranian strikes against the UAE and Saudi Arabia. A more pessimistic development was that, under the dual U.S.-Iran blockade, shipments from within the Gulf fell by approximately 1 million barrels per day from April levels, further intensifying the crude supply shortfall.
Despite shipment disruptions within the Gulf, OPEC Middle Eastern oil producers have not experienced critically high storage capacity utilization. This situation has been alleviated through measures like crude production cuts, increased domestic demand, and rerouted shipments. According to Kpler data, by the end of May, onshore petroleum storage tank (floating roof) capacity utilization for oil producers other than Bahrain remained within the 50-65% range. However, following the formal U.S. blockade announcement on April 13, Iran's capacity utilization showed a clear increase. Between April 12 and May 31, Iran's overall capacity utilization rose from 52.4% to 64.2%. While this increase is notable, it does not appear to have reached a critical level. However, focusing solely on Kharg Island, its capacity utilization surged from 65.7% on April 12 to 81.2% by the end of May. Although Iran has been using floating storage to mitigate capacity issues, it has been unable to avoid soaring utilization rates and forced production cuts.
V. Outlook We believe that in June, transit will be the primary issue of focus for both the U.S. and Iran, making it a crucial observation period for Strait traffic. If the transit issue remains unresolved in June, quoting a senior company executive's remarks from May 28: "Global crude inventories are approaching historically rare lows, with the inventory limit window down to just two to three weeks. At that point, physical Brent crude prices could experience a significant spike, potentially reaching the $150-$160 per barrel range." While such statements may contain an element of exaggeration, we clearly observe the diminishing buffering effect of floating storage and the rapid drawdown in inventories. If the transit issue remains unresolved, the world will undoubtedly face the most direct tangible impact in June. In such a scenario, the floor valuation for oil prices could potentially be pushed to the $90-$100 per barrel vicinity. For international oil prices, if U.S.-Iran negotiations progress smoothly at current levels, a final downward move might occur. One could consider buying on dips if WTI falls to around $80 per barrel. Alternatively, as prices approach the bottom range, implementing strategies like selling put options or setting up bullish risk reversals (selling puts at lower levels while simultaneously buying call options) could offer relatively higher safety.
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