Middle East Tensions Rattle Markets, But Fundamentals Hold Steady
Espresso Briefing #5: Key oil market developments this week, short and sharp like your morning espresso.
5 min read
Oil Market Outlook
Price Outlook
Iran produces roughly 3.3 million b/d, the majority of which is exported. This has been steadily increasing since the COVID lows of 2020 – however Israel hit an oil refinery in Tehran late last week, together with the largest gas field in the south (South Pars, shared with Qatar) and other energy infrastructure such as fuel depots. While this does hamper Iranian exports, the overall impact on global supply fundamentals is small. At Commodity Labs we expect oil prices to rise slightly in Monday’s market open as market sentiment is still concerned about further escalations following further attacks and threats across the region.
Prices already spiked 7–10% following Israel's targeted airstrikes on Iranian infrastructure last week, with Brent briefly breaching $78 and WTI nearing $74.
Key Drivers:
Elevated concerns around potential disruption to Iranian supply and shipping through the Strait of Hormuz.
Increased trading volume in oil call options (notably WTI $80) indicating speculative positioning.
No significant material supply losses yet—keeping pricing reaction risk-based rather than fundamental.
Forecasted Ranges:
Brent: $70–78/bbl
WTI: $66–74/bbl
Supply Outlook
Israel’s “Rising Lion” campaign targeted Iranian nuclear and energy-related facilities, including parts of South Pars, one of the world’s largest gas fields. So far, oil production and exports remain unaffected.
OPEC+ output increased slightly in June (~411 kbpd), and the group sees no need for emergency action.
Russian sanctions are set to tighten as the G7 pushes to lower the oil price cap from $60 to $45.
U.S. production remains near peak levels (~13.5 mbpd) despite falling rig counts.
Assessment: Supply is stable in physical terms, but markets are trading on elevated geopolitical risk premiums.
Demand Outlook
Demand fundamentals remain mixed but slightly positive, supported by seasonal factors:
Summer driving and air travel in the U.S. and Europe should increase refined product consumption.
Industrial demand in China and parts of Asia continues to lag, restraining global upside.
U.S. refinery utilization remains high, though consumer sentiment is strained by inflation worries.
Outlook: Demand is steady to mildly improving, with upside capped by weak industrial momentum in Asia.
Inventory Outlook
U.S. commercial crude inventories drew down by 3.6 million barrels for the week ending June 11.
Analysts forecast an additional draw of 1–2 million barrels in the week ahead.
OECD global inventories remain above five-year averages, reflecting a broader supply cushion.
Outlook: Domestic inventory draws support near-term prices, but ample global stocks act as a counterweight.
Key Market Drivers & Developments
Middle East Escalation
Israel’s precision strikes on Iranian military and energy targets—most notably South Pars and missile storage sites—marked the most direct confrontation in years. Iran retaliated with missiles and drones; diplomatic talks paused.
No direct hits on oil terminals or tankers were reported.
Brent spiked to ~$78.50 intraday—its sharpest one-day move in over a year.
Safe-Haven Flows & Volatility
Markets reacted with classic risk-off behavior:
Surge in oil, gold, Treasuries, and the U.S. dollar.
VIX volatility index jumped; equity indices like the S&P 500 and STOXX fell over 1%.
Bloomberg and CME data confirm a major increase in $80 oil call options, signalling traders are hedging against further upside risk.
Diesel Leads the Rally
Diesel futures rose nearly 8%—outperforming crude and gasoline—as concerns mounted over tight middle distillate inventories and potential logistical shocks in the Middle East.
Strategic & Policy Developments
The IEA confirmed it stands ready to release from its 1.2 billion barrel emergency stockpile.
OPEC+ reiterated that the market remains balanced and does not require immediate intervention.
The EU, backed by most G7 members, aims to tighten enforcement of sanctions on Russia, including a lower price cap and expanded vessel blacklists.
U.S. Production & Inventory Trends
Despite a multi-week fall in rig counts, U.S. production remains stable, indicating improved capital efficiency in shale operations.
EIA expects output to decline modestly into late 2026 due to fewer wells being drilled.
Refineries are running near peak capacity, with product inventories (gasoline, distillate) showing mixed trends.
Refining: Capacity, Runs, and Outages
Refining activity has become a pivotal factor in supporting product cracks and influencing short-term oil price dynamics, especially as geopolitical tensions put downstream logistics under the spotlight.
Capacity and Utilization
U.S. refinery runs remain exceptionally high, reaching over 93% utilization nationally in early June — near the highest seasonal levels since 2019.
The total U.S. operable refining capacity stands at approximately 18.1 million barrels per day (bpd) as of Q2 2025, still slightly below pre-COVID highs due to permanent closures in 2020–2021.
Gulf Coast refiners are operating at near full capacity, responding to strong diesel and gasoline margins.
Global Dynamics
Asia's refining sector, especially in China and India, has maintained elevated throughput. Chinese state refiners increased runs to absorb Russian crude discounts and meet domestic summer travel demand.
European refiners, however, are facing tighter margins due to Russian product restrictions and weaker consumer demand, with utilization in Germany and France hovering below 80%.
Outages and Maintenance
Planned U.S. maintenance has largely concluded for H1 2025. Unplanned outages have been minimal, though some West Coast refiners experienced localized slowdowns due to equipment issues and air quality constraints.
Middle East refineries—particularly in Iran—face uncertainty. Strikes near South Pars and Natanz have not caused reported outages, but some gasoline exports were delayed in the past week as a precautionary security measure.
Product Market Impact
Diesel cracks have widened sharply, reflecting tightness in distillate supply. This is partly due to high refining demand for lighter gasoline components and less emphasis on middle distillates.
Jet fuel margins are also rising seasonally, particularly in Asia and the U.S., aided by increased air travel and strong export flows.
Conclusion: Refining capacity is largely stable, but utilization is peaking in key markets. Strong product demand (especially diesel and jet) coupled with restrained global spare capacity means downstream bottlenecks could amplify any supply shocks—making refiner reliability a key watchpoint in coming weeks.
Fundamentals vs. Headlines
Forecasts remain divergent:
Goldman Sachs and Commerzbank see Brent normalizing in the $65–75 range but warn of upside scenarios to $100+ if Hormuz is blocked.
J.P. Morgan sees tail risks above $120/bbl under full disruption scenarios.
S&P Global expects a rebalancing of oversupply later in the year unless there are physical disruptions.
The market is balancing on a geopolitical tightrope—reacting swiftly to newsflow, but still anchored in resilient fundamentals.
Summary Table
Final Take
The oil market has re-entered a phase of volatility that is less about fundamentals and more about fragile geopolitics. The balance of physical supply and demand remains intact for now, but the situation is fluid. If the Israel–Iran conflict escalates into infrastructure damage or maritime chokepoints like the Strait of Hormuz are impacted, oil prices could breach $90–100 territory quickly. Until then, traders are pricing risk, not reality.
Stay focused on inventory reports, Hormuz shipping activity, and continued statements from OPEC+ and the IEA. This market isn’t predictable—but it is readable.