Oil prices bounced higher overnight after the US and Iran exchanged new strikes despite their purported ceasefire, rekindling uncertainty about an end to the Middle East war.
The latest strikes were the most serious since an April ceasefire, and came despite a series of headlines suggesting talks on a deal were progressing.
"A fresh exchange of strikes between the two countries is testing the fragile ceasefire and forcing a reassessment of the chances of a near-term agreement which can reopen the Strait of Hormuz and dial down the pressure the crisis is putting on the global economy," said AJ Bell investment director Russ Mould.
But then, around 1000ET, Axios reports that U.S. and Iranian negotiators have reached an agreement on a 60-day memorandum of understanding to extend the ceasefire and launch negotiations on Iran's nuclear program.
That sent oil prices reeling lower...
With the geopolitical headlines so dominant, this morning's official US crude inventory and supply data is taking a back seat to Washington and Tehran again (despite some chunky draws reported by API overnight).
API
Crude -2.8mm
Cushing -2.9mm
Gasoline -3.19mm
Distillates +1.1mm
DOE
Inventories saw across the board drawdowns with Cushing standing out. Distillate draws returned as gasoline stocks fell for the 15th straight week
Source: Bloomberg
'Tank Bottoms' loom as inventory at Cushing is the lowest for this time of year since 2014...
The Strategic Petroleum Reserve saw another major drawdown (over 9mm barrels)...
Source: Bloomberg
US Crude production ticked higher as rig counts are rising rapidly...
Source: Bloomberg
The market has backed away from believing the Axios report (after a denial from Iranian news) and the big draw is helping WTI recover...
"The bigger picture is that crude is still on course for a second weekly decline, suggesting investors are not yet pricing in a worst-case disruption," Hargreaves Lansdown analyst Matt Britzman said.
"For now, the market looks caught between short-term nerves over renewed hostilities and a lingering hope that both sides still have enough incentive to get energy flows moving," he added.
Investment strategist Ed Yardeni wrote in an overnight note that "oil markets will be in dire straits" if the Strait of Hormuz doesn't open soon. He sketched out looming crisis points that have turned the U.S.-Iran negotiation into the "ultimate game of chicken."
The U.S. blockade of Iranian ports means the country's oil industry is producing too much and storage capacity is quickly filling. Yardeni concludes that Iran has until mid- or late June before storage is maxed out, forcing a sharp cut in production to domestic consumption levels. "The toll on Iran's oil industry and its broader economy is certainly one of President Trump's best negotiating cards," he wrote.
Yardeni further notes that oil inventories in Asia are already approaching minimum levels, meaning the war-driven dearth of oil imports will soon lead to shortages.
Europe faces the same situation, possibly by late June.
Yardeni highlighted International Energy Agency Director Faith Birol's warning that depleted stocks and high usage during the summer travel season could push global oil markets into "the red zone in July or August."