Increased Middle East Tensions Drive Crude Prices Up

Crude oil and gasoline prices surged on Tuesday, with July WTI crude oil closing up +2.11 (+2.71%) and July RBOB gasoline closing up +3.22 (+1.30%). The rally in oil prices was driven by geopolitical tensions in the Middle East, particularly in the Gaza Strip, where an Egyptian soldier was killed in a clash with Israeli troops at a border crossing. Reports of Israeli tanks reaching the center of Rafah in Gaza further escalated concerns about potential disruptions to crude supplies.

In addition to the geopolitical risks, positive US economic news also contributed to the bullish sentiment in the energy markets. The Conference Board reported that the May consumer confidence index unexpectedly rose to 102.0, surpassing expectations of a decline to 96.0. Furthermore, the S&P CoreLogic composite-20 home price index showed a strong increase of +7.38% year-over-year, the largest jump in 17 months.

The ongoing conflict between Hamas and Israel, coupled with the possibility of a wider regional conflict involving Hezbollah in Lebanon or Iran, continued to support crude oil prices. Additionally, attacks on commercial shipping in the Red Sea by Iran-backed Houthi rebels have disrupted global crude oil supplies, forcing shippers to reroute shipments around Africa.

However, concerns about higher-than-expected Russian crude output and a decline in the crude crack spread tempered some of the bullish sentiment. Russian crude production exceeded the agreed-upon target with OPEC+ in April, while refineries struggled to come back online after being damaged by Ukrainian drone strikes. This led to a decrease in Russian fuel exports, impacting global supply levels.

On a positive note, the decline in crude oil held in floating storage vessels signaled tightening supply conditions. Data from Vortexa showed a significant drop in the amount of crude oil stored on tankers that had been stationary for at least a week, indicating a reduction in excess supply.

Looking ahead, market participants are closely watching the upcoming OPEC+ meeting on June 2, where member countries will discuss production levels. There are concerns that some members, including the UAE, Iraq, Algeria, and Kazakhstan, may seek to increase their production quotas, potentially leading to disagreements within the alliance. Saudi Arabia has urged caution in adding more barrels to the market, with the consensus leaning towards extending current production cuts into the second half of the year.

In the US, the latest EIA report showed that crude oil inventories were below the seasonal 5-year average, while gasoline and distillate inventories also remained relatively low. Despite stable crude oil production levels and a slight increase in active oil rigs, the overall trend in the US oil market has been a decline in rig count over the past year.

Overall, the combination of geopolitical tensions, positive economic data, and supply concerns continues to drive volatility in the crude oil market, with investors closely monitoring developments in the Middle East and OPEC+ discussions for further direction.