Geopolitical Deadlock and Tightening Inventories Drive Crude Oil Prices Higher on Friday

May 18th, News

On Friday, May 15, the international crude oil market witnessed a sharp surge, with NYMEX crude oil futures prices rising by more than 4%. Brent crude oil also surged in tandem. This week, cumulative price increases for both benchmarks have exceeded 7% and 10%, respectively. The primary driver of this rally has shifted from supply-and-demand fundamentals to risk premiums driven by the U.S.-Iran geopolitical stalemate. Coupled with the accelerating depletion of global oil inventories and disruptions to shipping through the Strait of Hormuz, multiple factors are converging to sustain high oil prices in the short term.

I. Price Trends: All Markets See Sharp Rises—Crude Oil Records a Significant Weekly Price Increase

On Friday, international crude oil futures rose. The June contract for U.S. WTI crude oil closed at $105.42 per barrel, up $4.25, or 4.2%. The July contract for Brent crude oil closed at $109.26 per barrel, up $3.54, or 3.4%.

Finished oil prices rose in tandem: In July, RBOB gasoline futures climbed 9.57 cents, representing a price increase of 2.77% to $3.5564 per gallon; July heating oil futures surged 14.69 cents, with a price increase of 3.89% to $3.9212 per gallon.

II. Core Driver: U.S.-Iran Negotiations Stalled, Geopolitical Risk Premium Soars

This round of skyrocketing oil prices is directly due to the escalating diplomatic deadlock between the US and Iran, with market expectations for a quick resumption of shipping through the Strait of Hormuz completely cooling down. Confrontational rhetoric and news of failed negotiations continue to rattle the market.

Negotiations Completely Break Down, Both Sides Maintain Firm Stances

On May 15, the U.S. and Iran simultaneously released tough messages, completely shattering the market’s illusions about a peace agreement: On the Iranian side, it was stated that the U.S. has explicitly rejected Iran’s written “14-point” proposal for ending the conflict, and Iran reaffirmed its hardline stance on the nuclear issue, leaving no room for compromise.

Moreover, during an interview aboard Air Force One, U.S. President Trump bluntly stated that he had never been in favor of a ceasefire with Iran and that the ceasefire was initiated solely “at the request of other countries.” At the same time, he dismissed Iran’s proposal as “unacceptable” and openly declared, “If Iran were to acquire weapons of mass destruction, I would simply veto the agreement.” The mutually uncompromising stances of both sides have rendered the already fragile ceasefire agreement virtually meaningless, and market concerns about a renewed escalation of the conflict are rapidly intensifying.

The Strait of Hormuz “Throat” Blocked—Global Supply Lifeline Under Pressure

Traffic through the Strait of Hormuz is currently near a standstill. Data show that as of May 14, only 10 vessels passed through in the past 24 hours—compared to an average of just 5 to 7 vessels per day in the weeks prior. News on May 18 indicated that traffic has virtually ground to a halt, with commercial tankers almost entirely absent from the waterway. Affected by the U.S.-Iran conflict, shipping volumes through the strait have plummeted from a pre-conflict daily average of 140 vessels to significantly lower levels, and supply disruptions continue unabated. Analysts at Commerzbank clearly pointed out that market expectations for a swift reopening of the strait have completely waned, and geopolitical risk premiums continue to rise.

III. Supply and Demand: Inventory in Critical Shortage & Weak Supply Hedging—Market Tolerance is Waning to the Point of Exhaustion

Apart from geopolitical conflicts, the rapid depletion of global oil inventories and the difficulty of U.S. production increases in offsetting the supply gap in the Middle East are providing solid support for oil prices. As a result, the market’s room for error in terms of supply and demand has shrunk to historically low levels.

Global inventories are being depleted at a "historic rate," tightening the physical market

Oil reserves are becoming increasingly tight, and the world is depleting its strategic stockpiles at an unprecedented rate. According to data from the International Energy Agency, global observable oil inventories declined by 250 million barrels in March and April, averaging a drop of 4 million barrels per day. Oil-producing countries in the Gulf have collectively lost over 1 billion barrels of supply, and more than 14 million barrels per day of production capacity has been forced to halt operations. Market analysts point out that the release of strategic petroleum reserves and the decline in demand have only provided temporary relief from the turmoil. A prolonged closure of the Strait of Hormuz would directly tighten the physical market, leading to shortages of refined petroleum products and sustained upward pressure on oil prices for months to come.

U.S. Drilling Rigs Continue to Rise, Making It Difficult to Hedge Geopolitical Shocks

Data show that U.S. energy companies have increased the number of oil and gas drilling rigs for the fourth consecutive week (rising to 551 rigs as of the week ending May 15, with 415 of those being oil rigs), sending a signal of increased production. However, in the short term, this increase will hardly offset the supply gap in the Middle East.

The trend of capacity contraction remains unchanged: The total number of drilling rigs currently stands 25 rigs (4%) lower than the same period last year. The decline in capacity resulting from the contraction in capital expenditures over the past year is proving difficult to reverse. Moreover, there is a lag in how supply adjustments are transmitted—between an increase in drilling rigs and a corresponding rise in actual production volume, it typically takes three to six months. Consequently, any newly added supply will not enter the market until at least the end of the third quarter of 2026. The underlying reason is that the scale of the supply gap is simply too large: the Strait bottleneck has led to a daily loss of millions of barrels of crude oil from the Middle East, and even moderate increases in U.S. production cannot fully offset this shortfall. As a result, short-term hedging efforts have been highly limited.

IV. Outlook for the Future Market: Geopolitical Premium Likely to Persist in the Short Term; Oil Prices Expected to Surge Again

Crude oil analysts believe that the core logic behind current oil prices has shifted from supply-and-demand fundamentals to the premium driven by geopolitical conflicts. Institutions generally agree that the high-price trend is unlikely to be broken in the short term, and under extreme scenarios, oil prices could surge even further.

In the short term, both the United States and Iran show no willingness to compromise, making it difficult for shipping in the Strait to quickly resume. Geopolitical risk premiums will continue to dominate oil price trends. Coupled with low inventories and potential shortages of refined products, oil prices are likely to rise more easily than fall, and the pattern of high volatility is unlikely to be reversed.

In the medium to long term, three key variables warrant close attention: First, whether the U.S. and Iran will resume negotiations and whether the ceasefire agreement can be effectively implemented; second, the combined impact of the pace at which global oil inventories are being depleted and the peak demand period during summer; and third, the timing of the actual increase in U.S. shale oil production and any adjustments to OPEC+ policies. Until these variables show substantial improvement, international oil prices will remain in a high range driven by geopolitical risk premiums, and further upward surges cannot be ruled out.