Oil Prices Continue to Depend on Geopolitical News, Especially US-Iran Conflict

In the short term, oil prices continue to be heavily influenced by the escalation and de-escalation of the US-Iran conflict. The first round of negotiations between the US and Iran in Switzerland concluded with positive comments from both sides and an agreement to push for a final deal within a 60-day timeframe. However, skepticism remains about whether more complex issues related to nuclear technology and passage through the Strait of Hormuz can be fully resolved within such a short timeframe. After all, the 2015 Joint Comprehensive Plan of Action (JCPOA) took 20 months of formal negotiations under former US President Barack Obama.

Significant Oil Price Declines

Brent crude for August delivery fell 4.79% to trade at $73.39 per barrel at 2:50 PM ET Wednesday, the lowest closing price since March 2, while the corresponding WTI crude contract fell 4.23% to trade at $70.11 per barrel.

Technical Analysis

According to commodity analysts at Standard Chartered, the 200-day moving average at $78.71 per barrel on June 23 provided a support level. However, this proved insufficient during the oil price sell-off at the 76.4% Fibonacci retracement level of $73.74 per barrel.

Both crude oil types are in oversold territory, with Brent crude's Relative Strength Index (RSI) at 29.07 and WTI at 28.13.

Strait of Hormuz Continues to Raise Concerns

StanChart reports a surge in confirmed voyages through the Strait of Hormuz, with a total of 71 transits recorded from June 19-21. However, these voyages remain opportunistic and cautious, with the strait still vulnerable to closure in the short term, particularly after the escalation in US-Iran rhetoric during the most recent round of negotiations.

US Oil Inventories

Although official announcements regarding the timeline for normal operations to resume are limited, analysts forecast that the normalization of oil supply is unlikely to occur before the third quarter of this year. StanChart holds a particularly pessimistic view on oil price prospects, suggesting that the sharp collapse in China's crude oil imports is likely to restrain oil prices.

China's Oil Import Trends

Indeed, China has shifted from relying heavily on imports of physical cargoes to utilizing its large strategic reserves. China's customs import data for May showed total crude oil imports falling to 7.82 million barrels per day, the lowest level since February 2018. Imports this month decreased by 3.2 million barrels per day compared to the same period last year (-29), decreased by 1.58 million barrels per day compared to the previous month (-17), and were 4.76 million barrels per day lower than the pre-conflict level in February (-38).

China has significantly cut crude oil imports from the Middle East from February, when the Iran conflict began, to May, notably from Iraq, UAE, Russia, Saudi Arabia, and Oman. China also reduced oil imports from Malaysia by 900 thousand barrels per day, which may represent Iranian oil drums, and from Congo by 179 thousand barrels per day. Meanwhile, they increased imports from South Sudan by 120 thousand barrels per day, Canada by 71 thousand barrels per day, Indonesia by 65 thousand barrels per day, Colombia by 27 thousand barrels per day, and Brazil by 10 thousand barrels per day, indicating diversification of cargoes as Gulf drum exports were restricted.

Total oil imports from Russia reached 1.967 million barrels per day, with Saudi Arabia second at 1.337 million barrels per day, while Brazil was not far behind at 1.278 million barrels per day.

StanChart notes that the timing of China's return to the physical cargo market will be a key factor for the recovery of global demand and the trajectory of oil prices through year-end.

Refined Oil Product Market

That said, StanChart has pointed out some notable differentiation in the refined oil product market. While geopolitical risk has been reduced across most refined oil products, middle distillates are increasingly trading based on more economic fundamentals than geopolitical factors, with diesel and gasoil struggling under pressure from weaker industrial demand.

However, strength remains in gasoline, with the RBOB-Brent spread currently at $43.04 per barrel, the highest in nearly four years, while the RBOB-WTI spread is at a six-week high of $50.54 per barrel. According to StanChart, refiners optimized for gasoline production are benefiting during the summer peak season.

On the other hand, US gasoline inventories are quite tight at 214.24 million barrels as of June 12, 14.29 million barrels below the five-year average. Retail prices continue to soften, with the American Automobile Association (AAA) citing the national average retail gasoline price at $3.928 per gallon on Wednesday, down from the high of $4.564 per gallon on May 20.

Attacks on Russian Refineries

StanChart notes that attention is gradually returning to the significant escalation in Ukraine's attacks on Russian refinery assets, particularly affecting gasoline and diesel supply, providing a degree of structural support. Recently, we reported that Moscow's massive refinery is unlikely to restore production before early 2027 after suffering severe structural damage from repeated long-range Ukrainian drone attacks. The plant produces 2.9 million tons of gasoline and 3.2 million tons of diesel annually, meeting approximately 40% of Moscow's total fuel market and 70% of the region's capital's fuel and aviation kerosene demand.

A series of targeted attacks in mid-June completely shut down the facility operated by Gazprom Neft in Kapotnya. Industrial sources indicate that necessary repairs will take at least six months, although a more pessimistic outlook pushes the timeline into next year.

Conclusion: Oil prices in the short term remain highly sensitive to geopolitical news, particularly developments in US-Iran negotiations. Meanwhile, the sharp decline in China's oil imports is creating downward pressure, but factors such as tight US gasoline inventories and attacks on Russian refinery infrastructure are providing a degree of support to the market.