Oil settles higher as hopes of peace in the Middle East dwindle

[NEW YORK] Oil prices settled higher for the third consecutive session on Tuesday (May 12) as stark differences between the US and Iran over a proposal to end the war in the Middle East raised concerns that supply disruptions upending the global oil market are likely to be prolonged.

Brent crude futures gained US$3.56, or 3.42 per cent, to settle at US$107.77 a barrel, and US West Texas Intermediate futures closed up US$4.11, or 4.19 per cent, at US$102.18. Both benchmarks had climbed nearly 3 per cent on Monday.

US President Donald Trump said on Monday that ceasefire talks with Iran were on “life support”, pointing to disagreements over Teheran’s demands of a cessation of hostilities on all fronts, the removal of a US naval blockade, the resumption of Iranian oil sales and compensation for war damage.

Iran also emphasised its sovereignty over the Strait of Hormuz, through which about a fifth of global oil and liquefied natural gas (LNG) normally flows.

“Markets are doubting that a peace deal is within reach,” StoneX analyst Alex Hodes said.

EIA: Strait may be closed to late May

The US Energy Information Administration (EIA) on Tuesday said that it now assumes the strait will be effectively closed through late May, leading to much larger losses of Middle Eastern oil and gas supplies than its prior forecasts. The agency had earlier expected the waterway would be shut through late April.

Even after flows resume through the Strait of Hormuz, it will take at least until late 2026 or early 2027 for oil output and trade patterns to return to pre-conflict levels, the EIA said.

Disruptions linked to the near-closure of the strait have prompted producers to curtail exports, with a Reuters survey on Monday showing Opec oil output in April fell to its lowest level in more than two decades.

The EIA estimates 10.5 million barrels per day (bpd) of output were lost during April across the Middle East due to the strait closure, limiting exports.

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Other sources have pegged the supply losses much higher. JP Hanson, global head of oil and gas at Houlihan Lokey, said the conflict has created a 14 million bpd supply gap.

“The market now faces an aggregate billion-barrel deficit, compounded by drained strategic reserves and limited capacity to replace lost volumes,” Hanson said.

Saudi Aramco CEO Amin Nasser warned on Monday that disruptions to oil exports through the strait could delay a return to market stability until 2027, with the loss of about 100 million barrels of oil per week.

Rising US exports, dwindling stockpiles

Prolonged loss of Middle Eastern supply is forcing countries around the world to burn through their oil and gas stockpiles. The EIA now expects global oil inventories will fall about 2.6 million bpd this year, much more than its previous forecast of a 300,000 bpd decline.

In the United States, crude stocks were estimated to have dropped by about 2.1 million barrels last week, an extended Reuters poll of analysts showed. US fuel inventories are also expected to have declined last week, the poll showed.

“Global oil balances continue to tighten daily with the loss of supply easily exceeding the price-induced reduction in demand,” oil trading advisor Ritterbusch and Associates said.

“This keeps us in a bullish frame of mind where nearby crude futures appear to possess another US$10-12 per barrel on the upside before such lofty pricing forces some significant concessions on the part of the US, Iran or both.”

Market participants were also keeping a close eye on Trump’s planned meeting with Chinese President Xi Jinping on Thursday and Friday after Washington imposed sanctions on three individuals and nine companies for facilitating Iranian oil shipments to China.

Tariffs imposed during the US-China trade war have halted most Chinese imports of US oil and LNG, which were worth US$8.4 billion in 2024, the year before Trump began his second term. REUTERS