Geopolitical Expectations Reversal Drags Down Crude Oil, Wednesday's Plunge Exceeds 5%

May 28th, according to reports

On May 27, the international crude oil market suffered a sharp plunge, with both major benchmark crude oil futures experiencing price declines exceeding 5%. During trading, prices hit their lowest levels in a month as the risk premium accumulated earlier due to geopolitical tensions rapidly subsided. This round of sharp oil price decline was not driven by a single factor but rather by three key influences: repeated shifts in expectations regarding U.S.-Iran negotiations, an improving outlook for navigation through the Strait of Hormuz, and easing expectations of geopolitical conflicts—combined with U.S. crude oil inventory data. As a result, the market’s trading focus has gradually shifted from “concerns about supply shortages” to “anticipations of a calming situation,” leading to a noticeable reversal in oil prices’ short-term trend.

I. Market Performance: A sharp across-the-board decline, with price decreases offsetting earlier price increases.

On that day, global benchmark crude oil and refined product futures all weakened simultaneously, with significant fluctuations in prices. As of the close on May 27, New York time, the July contract for U.S. WTI crude oil futures settled at $88.68 per barrel, down $5.21, or 5.6%. The July contract for Brent crude oil futures settled at $94.29 per barrel, down $5.29, or 5.3%. This round of decline completely erased all the price increases from the previous trading day.

The refined oil sector followed the downward trend of crude oil prices. In July, RBOB gasoline futures fell by 7.98 cents, representing a price decrease of 2.54%, with the settlement price at $3.0670 per gallon. July heating oil futures dropped by 9.24 cents, marking a price decline of 2.55%, and ended at a settlement price of $3.5289 per gallon. Overall, the price decline in crude oil was significantly greater than that in refined oils, reflecting that the core of market volatility remains centered on geopolitical risks affecting crude oil supply.

II. Trend Analysis: U.S.-Iran Negotiations Ease Tensions, While U.S. Crude Oil Inventory Data Fails to Reverse the Downward Trend

Core Logic: US-Iran negotiations influence market sentiment, with geopolitical risk premium rapidly dissipating

This round of oil price plunge is fundamentally due to Iranian media disclosing the framework document of a US-Iran memorandum of understanding, which first ignited market optimism about a reconciliation between the two sides. Although the US White House later publicly denied the authenticity of the document, calling its contents completely fabricated, the market's trading logic did not reverse. On one hand, signals from Iran indicated a lower probability of returning to conflict, leading traders to generally judge that the likelihood of a peace agreement being reached had increased; on the other hand, after a prolonged period of conflict, there was a strong expectation in the market for a easing of the situation in the Middle East, and investment preferences shifted towards a de-escalation of the conflict. The risk premium on oil prices, which had been pushed up by the geopolitical conflict, began to be unwound.

Looking back at the recent situation, market sentiment has experienced multiple rounds of volatility. Earlier, U.S. airstrikes against Iran and Israel’s intensified strikes on Lebanon completely dashed hopes for a brief ceasefire and triggered a temporary rebound in oil prices. However, following the recent reports of U.S.-Iran negotiations, the market has stopped being swayed by short-term frictions and is now more inclined to anticipate a gradual easing of the long-term conflict—this shift has become the key factor weighing on oil prices.

Supply-side change: Navigation through the Strait of Hormuz is recovering, easing global supply concerns.

The closure of the Strait of Hormuz due to conflicts has disrupted daily oil supplies in the Middle East by more than 14 million barrels, serving as a key factor behind the sustained rise in oil prices. However, shipping data released on May 27 showed a marked improvement: Iranian authorities confirmed that a total of 23 commercial vessels of various types had safely passed through the strait over the past 24 hours under enhanced security measures. As shipping activities in the strait gradually resume, the market now anticipates that this vital energy artery could soon fully reopen, allowing global energy flows that have been disrupted to gradually recover and significantly reducing the short-term risk of crude oil supply disruptions. Industry analysts believe that the rebound in shipping volumes further reinforces expectations of easing tensions, directly weakening the supply-side support for oil prices.

Inventory Data: Inventory continues to decline but not as much as expected, limiting the positive impact.

The inventory data released by the American Petroleum Institute (API) failed to offset the downward pressure stemming from geopolitical headwinds. According to the data, as of the week ending May 22, U.S. crude oil inventories fell for the sixth consecutive week, declining by 2.8 million barrels during the period; gasoline inventories also declined by 3.2 million barrels; meanwhile, distillate fuel inventories rose by 1.1 million barrels. In comparison with market expectations, analysts had previously forecast a decline of 4.1 million barrels in crude oil inventories, 2.4 million barrels in gasoline inventories, and 1.0 million barrels in distillate fuel inventories. The actual decline in crude oil inventories was significantly lower than expected, indicating that domestic crude oil consumption was weaker than market forecasts. Coupled with a slight increase in distillate fuel inventories, the positive impact from inventory developments was limited, making it difficult to reverse the downward trend in oil prices.

III. Outlook for the Future Market: The volatile situation remains the biggest variable, and oil prices still face significant risks of wide-ranging fluctuations.

Crude oil analysts believe that the current crude oil market has entered a phase dominated by geopolitical sentiment, and its short-term trend is highly dependent on the progress of U.S.-Iran negotiations and the geopolitical situation in the Middle East.

Overall, the future statements of the US and Iran still show differences, with the White House denying the agreement document and Iran sending signals of easing tensions. The positions of both sides have not yet been unified, and the negotiation process is likely to be full of twists and turns. The repeated fluctuations in geopolitical sentiment will lead to a wide range of oil price volatility. Additionally, the resumption of navigation in the Strait is a key factor on the supply side. If the number of passing vessels continues to increase, the tight supply situation will further ease, limiting the upward space for oil prices. If the conflict escalates again and the passage through the Strait is once more obstructed, oil prices will quickly rebound. Thirdly, fundamental data such as inventory and demand will also play a role, especially during periods of stable geopolitical sentiment, when inventory and demand data will re-influence the rhythm of oil prices.

Overall, in the short term, international oil prices will find it difficult to establish a clear trend. Before the geopolitical situation becomes fully clear, the market will remain highly volatile, and investors need to closely monitor the geopolitical dynamics in the Middle East and the Strait navigation data.