Oil closes up more than 4% on halt in US-Iran talks, risk of blockades

[NEW YORK] Oil prices settled more than 4 per cent higher on Monday (Jun 1) after Iran’s Tasnim news agency reported that Teheran had halted indirect negotiations with the US and plans were being made for Iranian forces and their allies to completely block the Strait of Hormuz and potentially disrupt other key shipping routes.

Tensions in the region have escalated in recent days, with Iran and the US exchanging strikes and Israel ordering troops to move further into Lebanon in its battle with the Iran-backed Hezbollah militant group.

Brent crude futures settled at US$94.98 a barrel, up US$3.86, or 4.2 per cent, while US crude futures closed at US$92.16 a barrel, up US$4.80, or 5.5 per cent. Both benchmarks had risen more than 6 per cent earlier in the session, but pared gains after US President Donald Trump said he was not aware of talks with Iran being halted and that he also spoke with Hezbollah through intermediaries and secured a pledge that it would not attack Israel.

The contracts finished May between 17 per cent and 19 per cent lower, marking their biggest monthly drops in absolute terms since March 2020, when the Covid-19 pandemic slashed energy demand, on rising optimism that the US and Iran were close to a deal.

Earlier on Monday, Tasnim said that Teheran and the “Resistance Front”, which includes Iran’s allies in Yemen, Lebanon and Iraq, have set an agenda to completely block the Hormuz waterway and activate other fronts, including the Bab el-Mandeb Strait, in order to “punish” Israel and its supporters.

The Bab el-Mandeb is located at the southern end of the Red Sea, through which Saudi Arabia, a major oil producer, currently moves four million to six million barrels of oil per day, Robert Yawger, executive director at Mizuho, wrote in a note.

“It just seems that both sides are in different worlds,” said Andrew Lipow, president of Lipow Oil Associates.

“The longer the conflict continues, the lower commercial inventories will get ... at which time prices spike. We are only a month or two away from that,” he said. The escalation poses a further obstacle to hopes of a swift end to the crisis, which has effectively shut down the Strait of Hormuz, a vital global supply route for oil and liquefied natural gas. An Axios report said on X on Friday that Iran had dropped more mines in the strait last week.

Clear rules needed

Shipping executives meeting in Athens on Monday said that any peace deal would need to offer clear rules allowing vessels to resume normal business through the Strait of Hormuz.

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WTI expected to face further downside pressure

Alongside oil supply concerns, economic data from China over the weekend that showed stalling factory activity added to fears the world’s second-largest economy is losing momentum. Goldman Sachs said on Sunday that weak oil demand in China and Europe poses a major downside risk to its fourth-quarter Brent crude forecast of US$90 a barrel and WTI forecast of US$83, although supply disruptions in the Middle East could still push prices higher.

Saudi Arabia is likely to cut its official selling prices for crude oil to Asia in July for a second consecutive month, a Reuters survey showed.

Russia’s government, meanwhile, intends to increase fuel supplies from Belarus and tighten oversight over exports of petrol and diesel to meet domestic fuel demand, the RBC news outlet reported on Monday, citing two sources familiar with the matter. A complete ban on petrol exports for two months is under discussion, the report said.

US crude stockpiles are expected to have fallen by about 3.6 million barrels in the week ended May 29, according to a preliminary Reuters poll released on Monday, extending the prior week’s draw. Inventories of distillates and petrol are also likely to have declined, the poll showed.

Kazakhstan has restored its oil production to 290,000 tonnes per day following earlier production losses at the Tengiz oil field, Energy Minister Erlan Akkenzhenov said on Monday.

Venezuela’s oil exports rose slightly to 1.25 million barrels per day in May, its third consecutive monthly increase, fuelled by more cargoes to the US, India and Europe, shipping data showed on Monday. REUTERS