Oil rises as US and Iran trade strikes

USOIL analysis

The United States struck three Iranian oil carriers on Saturday in response to attacks on two of its warships in the region ^[1], while Tehran said it retaliated with further action, launching ballistic missiles against US ships ^[2]. The fresh hostilities follow the recent resumption of military operations for the first time since July and the expiry of the Memorandum of Understanding between the two sides. At the same time, the US Treasury is imposing economic restrictions on Iran and its enablers through Operation Economic Outcast. ^[3]

The continuation of strikes between the two sides raises fears of escalation while hurting prospects of a deal. US Energy Secretary Chris Wright poured cold water on hopes for an agreement while raising the prospect of a prolonged conflict. Speaking on ABC's This Week, he remarked that "there may not be" a nuclear deal and that the US may simply need to destroy Iran's nuclear capabilities. ^[4]

The crude market tightens the longer transit through the Strait of Hormuz remains constrained. In its latest monthly report, the IEA projected a larger decline of 4.3 million barrels per day in supply this year while expecting a deficit in the current quarter ^[5]. At the same time, the massive release of stockpiles to address shortages has depleted global inventories, with the US Strategic Petroleum Reserve falling to its lowest level since 1982 ^[6]. These inventories will need to be replenished once the situation normalises, providing a floor for demand.

Oil prices remain elevated as the fresh hostilities keep the risk premium high and flow disruptions continue. After its best week since July, USOIL rises again today and stays on track for recapturing the $100 mark. However, the technical and fundamental outlook is not straightforward. USOIL faces pushback at last month's peak and an inability to clear this hurdle could renew pressure and open the door to a move below the EMA200 that would pause the bullish bias.

Despite staying well below pre-war levels, crude continues to find its way out of the Middle East through the Strait or alternative routes. Moreover, the prolonged spike in energy prices alongside economic headwinds is leading to demand destruction. The IEA expects demand to drop by 1.6 million barrels per day in 2026 and the market to return to a surplus toward the end of the year. Additionally, the US is seeking to restore its inventory through the Venezuela deal, with the Energy Secretary saying exports from the country are up 50%.

Meanwhile, President Trump has been downplaying the conflict with Iran and recently suggested it may not last long ^[7]. High crude prices are creating domestic headwinds that could incentivise him to end the conflict, which partly explains the recent shift toward tighter sanctions. Gasoline prices are above $4 per gallon and persistent inflation is pressuring the Fed to hike interest rates, running counter to Trump's push for lower borrowing costs. Iran, meanwhile, is grappling with the economic impact of the war, which could eventually pressure it to seek a deal.