Oil rebounds as US hits Hormuz targets with talks at an impasse

[SINGAPORE/NEW YORK] Oil advanced, following a drop of more than 5 per cent on Wednesday (May 27), as US forces made fresh strikes in the Islamic Republic, while Washington and Teheran remained at odds over how to reopen the Strait of Hormuz.

Brent rose above US$96 a barrel, while West Texas Intermediate was near US$90. American forces carried out airstrikes on a military site, according to a US official, who described them as defensive. US forces also shot down drones fired at a commercial ship and struck a launching unit, the official said.

On Wednesday, US President Donald Trump said that he was “not satisfied” with the talks, as the White House denied an Iranian report on a draft agreement that said Teheran and Oman would oversee the waterway. “The strait’s going to be open to everybody,” Trump said, adding the US will “watch over it”.

Crude is still on pace for a second weekly drop on optimism that the warring parties will manage to conclude at least an interim deal, despite the challenges. Sticking points in the negotiations include the nation’s nuclear programme and Iran wanting to retain control over Hormuz, which remains subject to a double blockade imposed by both Teheran and Washington.

Adding to challenges, Trump said at a White House meeting that he would not agree to a bad deal and insisted the US would not ease sanctions, at odds with Teheran’s demand for an end to attacks and financial relief. The president also faces pressure from Republican hardliners to continue the war, which is now entering its fourth month after erupting at the end of February.

While markets are pricing in the prospect of a deal “through a strong glass-half-full mindset”, the scope for the parties walking away from the negotiating table “remains a clear risk”, said Chris Weston, head of research at Pepperstone Group in Melbourne.

In the US, an industry group flagged another drawdown in oil stockpiles. The American Petroleum Institute reported that nationwide crude holdings fell 2.8 million barrels last week, including a decline at the hub in Cushing, Oklahoma. Official data are due later Thursday.

“The oil market is very complacent right now,” said Joe DeLaura, global energy strategist at Rabobank, noting that releases from strategic petroleum reserves, as well as sharply lower imports by China, were helping to cushion part of the loss of supply caused by the war.

“By mid-July, if China starts importing again when the SPR releases end, we are in the hockey-stick-upward inflection point for so many refined products,” he said, describing a potential spike in prices.

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Brent crude jumps 4%, as US strikes in Iran set back hopes for Hormuz re-opening

The failure to forge a deal to end the conflict is threatening to prolong the disruption to oil supplies, which has caused a steep jump in bond yields since late February by rekindling inflation. Central banks, including the US Federal Reserve, are expected to eventually raise interest rates in response. BLOOMBERG