Oil prices experienced significant gains in March, with geopolitical factors serving as the primary pricing anchor. Throughout March, geopolitical tensions were undoubtedly the market's main focus. Since the United States, alongside Israel, initiated military action against Iran on February 28th, the conflict has continued to spread throughout the month, showing signs of escalating beyond control. As of March 31st, the front-month WTI contract settled at $101.38 per barrel; the front-month Brent contract settled at $103.97 per barrel; and the front-month INE SC crude contract settled at 745.1 yuan per barrel. International oil prices showed a clear upward trend. During the month, repeated "TACO" remarks from former President Trump regarding the U.S.-Iran conflict caused substantial volatility, with prices fluctuating widely at elevated levels. As the conflict evolves, market attention is now centered on the final decision expected from U.S. President Trump on April 7th. Until then, the market sentiment is mixed. Bulls remain convinced that the U.S., Iran, and Israel each have difficult-to-resolve core issues—such as Strait jurisdiction, reparations, and enriched uranium—making a ceasefire agreement unlikely. Bears, however, argue that with the midterm elections approaching and the authorized period for presidential military action nearing its end, Trump is eager to declare "victory" and disengage from the Middle East. Given the unpredictability of Trump's actions, and considering that hostilities between the U.S. and Iran have intensified into early April, with the Revolutionary Guard maintaining a firm stance, negotiations are expected to face significant challenges. However, the possibility of Trump unilaterally declaring an end to the conflict cannot be ruled out. Meanwhile, the sharp strengthening of crude oil time spreads in March indicates continued tightness in physical supply. Combined with March CFTC positioning data, it appears traders remain active in purchasing crude oil. Should the conflict escalate, there is a risk of the Strait being completely closed again, which would likely cause time spreads to widen further. Conversely, if Trump announces de-escalation or extends the deadline, and given that navigation conditions have already improved noticeably, time spreads could gradually decline in the subsequent period.
By the end of March, U.S. crude oil production continued to operate at high levels. However, U.S. shale producers have consistently shown caution towards short-term price volatility. If oil prices continue to rise, producers might consider increasing output, but currently, there is no strong willingness to ramp up production. Instead, producers are more inclined to hedge at current high prices to lock in higher revenues. On the import-export front, imports saw a slight decrease at month-end while exports surged significantly, leading to a notable expansion in net exports. This reflects the release of 1 to 1.5 million barrels per day from the U.S. Strategic Petroleum Reserve (SPR), with additional volumes expected to be exported from the U.S. Gulf Coast (USGC). Due to high oil prices and the contango structure in the NYMEX WTI M1-M4 spread, export volumes are anticipated to remain above historical averages. U.S. apparent crude demand saw a significant increase early in March, driven by higher crack spreads, but subsequently declined in tandem with the retreat in crack spreads. For refined products, apparent demand fell sharply towards the end of March, primarily due to weak U.S. economic conditions and the current off-peak season for gasoline and diesel consumption in the U.S. Notably, towards the end of the month, the U.S. strategic reserve recorded its first decline this year, dropping by a total of 378,000 barrels compared to early February.
According to the EIA's February monthly report, the global supply-demand balance for March was projected to show a deficit of 1.88 million barrels per day. However, the actual situation may be tighter than the EIA's forecast. Updated EIA monthly reports will be crucial for assessing the global supply-demand balance going forward. If Strait navigation remains obstructed and the U.S.-Iran conflict escalates further, supply tightness is expected to intensify.
An OPEC website statement indicated that eight countries—Saudi Arabia, Russia, Iraq, the UAE, Kuwait, Kazakhstan, Algeria, and Oman—have decided to implement a production adjustment of 206,000 barrels per day from the additional voluntary cut of 1.65 million barrels per day announced in April 2023. This adjustment is scheduled for implementation in May 2026. Depending on market conditions, the 1.65 million barrels per day cut could be partially or fully phased back in. The countries will continue to monitor and assess market conditions closely, reaffirming the importance of a prudent strategy to support market stability while retaining full flexibility to increase, pause, or reverse the voluntary cut reduction process, including potentially reversing the 2.2 million barrels per day voluntary cut announced in November 2023. However, most OPEC+ production increase plans remain theoretical. Russia previously had spare capacity for increases, but the likelihood of realizing this has diminished due to attacks on its export terminals. Middle Eastern OPEC members, constrained by export capacity limitations, also see their planned increases largely confined to the "theoretical level."
Thus far, Gulf member states are facing forced production cuts due to export and storage capacity issues. According to the IEA's March report, Middle Eastern Gulf countries have already reduced their total oil production by at least 10 million barrels per day. Official OPEC data for March member production has not yet been disclosed, but a significant downward adjustment is anticipated. If Houthi attacks escalate and Iran increases strikes on UAE facilities like Fujairah, Gulf states may have further room for additional production cuts. The data below reflects official OPEC figures up to February.
Global floating storage continues to rise, with volumes held for over 7 days increasing by nearly 20 million barrels. A breakdown shows this consists mainly of Middle Eastern and Iranian crude, located near the Middle East Gulf and the Yellow Sea. Within the Middle East Gulf, volumes are increasingly being held on floating storage as the Strait blockade persists. Iranian crude, affected by permitted passage, is moving eastward to wait near the Yellow Sea for instructions from Asian buyers. Global onshore petroleum inventories continue to decline, falling by over 30 million barrels in the past week, with some of this volume converting to floating storage. Middle Eastern on-land inventories have seen reduced accumulation due to pipeline exports serving as an alternative. More importantly, the rate of inventory drawdown since the conflict began is raising concerns within the industry. Global oil in transit has declined, partly due to statistical reclassification of increased floating storage volumes out of the 'in transit' category, and partly because obstructed Middle Eastern exports have drastically reduced the volume of Middle Eastern crude in transit. Russian oil in transit has also decreased, aided by imports from India helping to draw down stocks.
Currently, major Middle Eastern ports like Iran's Kharg Island, Saudi Arabia's Yanbu, and the UAE's Fujairah remain operational for relatively smooth oil shipments. According to Kpler weekly data, the Saudi port of Yanbu typically maintains weekly average shipment levels of 2 to 5 million barrels per day. However, due to high vessel traffic recently, port congestion has slightly reduced overall shipment levels. The UAE's Fujairah port, while not facing congestion issues, grapples with frequent missile attacks from Iran's Revolutionary Guard, causing its shipment volumes—typically between 1 and 3 million barrels per day—to be unstable. Iran's Kharg Island has been unaffected by the conflict so far, maintaining an average weekly shipment level of around 1 million barrels per day. Should the conflict escalate, all three major export ports face potential disruption: Fujairah could suffer intensified Iranian retaliation; Yanbu might be affected if Houthi forces block the Bab el-Mandeb Strait; and Kharg Island would likely become a primary target for U.S. strikes. Overall export conditions remain highly dependent on geopolitical developments.
With the escalation of the U.S.-Iran conflict, Russian crude has experienced a temporary easing of blockades, a situation unfavorable to Ukraine. To curb Russia's ability to replenish its finances, Ukraine conducted frequent large-scale attacks on Russian refining and export infrastructure throughout March. The most significantly affected were the key Russian oil ports of Primorsk and Ust-Luga, with Ust-Luga sustaining greater damage. This has led to a noticeable decline in shipments from Ust-Luga; although some pipeline diversion is possible, it is still expected to impact several hundred thousand barrels per day of Russian exports.
Geopolitical disputes remained the central trading anchor for the month. However, Trump's repeated "TACO" remarks make predicting the conflict's future path highly uncertain. While a definitive path is elusive, several potential scenarios can be outlined: 1. U.S.-Iran Ceasefire: Oil Prices Shed Geopolitical Premium. As of April 6th, a prevailing market view suggests a preliminary ceasefire agreement could be reached within 48 hours. The proposed terms reportedly include Iran abandoning its nuclear weapons program in exchange for sanctions relief and the unfreezing of assets. A plan to end hostilities in the Middle East would need consensus by Monday. If agreed, this would lead to an immediate ceasefire, the reopening of the Strait of Hormuz, and a final agreement within 15-20 days. Following this news, both WTI and Brent prices fell, indicating market belief in its plausibility. Subsequently, an Iranian Foreign Ministry spokesperson stated, "Iran is prepared to respond to the mediators and will inform in a timely manner if necessary." If confirmed and officially announced by both the U.S. and Iran, Brent could shed approximately $10 per barrel of its geopolitical premium. However, this scenario contains inconsistencies. The Iranian Foreign Ministry has issued multiple "conciliatory" statements since the war began, and figures like Foreign Minister Abbas Araqchi and President Masoud Pezeshkian do not hold ultimate military authority; since the Iran-Iraq War, the Revolutionary Guard has held dominant military power. Following the deaths of Khamenei and Larijani, Iran's internal voices are not unified. Furthermore, while the agreement shows concessions from both sides, the U.S. still demands the reopening of the Strait of Hormuz—a concession Iran, currently in an advantageous position, is unlikely to make lightly, nor would it readily abandon its stockpile of highly enriched uranium. Therefore, the likelihood of a ceasefire within 48 hours remains questionable. 2. Negotiations as Prelude to Escalation: Full-Scale War Erupts. Within 48 hours, President Trump could escalate the conflict, launching further strikes against Iranian energy and civilian infrastructure, such as power plants, Kharg Island's production and export facilities, and major bridges within Iran. If the war escalates, Iran would likely retaliate in kind, potentially leading to attacks on energy facilities across the Middle East. Houthi forces might move to close the Bab el-Mandeb Strait, and the Strait of Hormuz would likely be closed again (similar to the closure of the Larak Island route after Qeshm Island was bombed). In this scenario, Brent prices could rapidly surge into the $130-$150 per barrel range. 3. Venezuela Model Revisited: U.S. Attempts a Swift Conclusion. The U.S. might opt to deploy ground forces. Elite units like the Navy SEALs and the 82nd Airborne Division are reportedly fully deployed in the Middle East, with the USS Gerald R. Ford aircraft carrier arriving to complete the deployment. Based on the historical actions of deployed units like the Rangers and SEALs, a special forces operation replicating the "Venezuela model" is a distinct possibility. Potential objectives could include: 1) Capturing Kharg Island; 2) Amphibious landing in Balochistan; 3) Capturing Mojtaba or attacking/securing enriched uranium stockpiles. Furthermore, a March 28th report in Stars and Stripes, the Pentagon-operated newspaper, stated that the Pentagon requested prefabricated shelters that could be rapidly transported to the Middle East, with delivery required within 3, 15, and 30 days. All proposals must deliver goods to King Hussein International Airport in Jordan. Prefabricated shelters are essential equipment for U.S. special operations, increasing the probability of such an scenario. Oil prices could spike above $130 per barrel in the short term.
In summary, the situation remains highly uncertain. The outcome largely hinges on the final decision from U.S. President Trump following his self-imposed deadline. As of April 6th, oil prices fell sharply on news of potential talks, but no compelling official confirmation or detailed ceasefire terms have emerged. Recalling that the U.S. made multiple diplomatic attempts before the Iraq invasion, the current "diplomatic efforts" could potentially be a precursor to an escalation of warfare.
Geopolitics will remain the primary variable this month, with traders advised to exercise caution around President Trump's decision expected on April 8th. Crude oil is expected to continue experiencing wide price swings throughout April. Upside risks remain significant if the conflict escalates and both sides broaden their target lists. A formal blockade of the Bab el-Mandeb Strait by Houthi forces or major Iranian attacks on energy and export infrastructure in other Middle Eastern countries could lead to a non-linear spike in oil prices. Conversely, if Trump insists on ending the war, he might unilaterally declare "victory" on or around April 8th, formally ceding Strait jurisdiction to Iran and Oman, which would cause a substantial portion of the geopolitical premium in oil prices to rapidly unwind.
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