Oil prices continued to form small doji candlesticks on Tuesday, with international benchmarks surging higher during the overnight session only to retreat sharply against a backdrop of unexpectedly high supply pressure, with Shanghai crude hitting a new low for this corrective phase.

However, the latest API data released early Wednesday showed US crude inventories still declined substantially. The market is caught in a tug-of-war between the larger-than-expected supply increments and the persistent inventory drawdowns, with investors currently appearing more concerned about the oversupply scenario.

The second quarter saw crude oil prices fall by approximately 30%, marking the worst quarterly performance since 2020. Data indicates that crude oil exports from the UAE and Russia in June hit record highs. Notably, the UAE's exports surged to a historical high following its exit from OPEC, while Iraq has been offering significant discounts to attract buyers.

EIA data shows US crude oil production in April increased by 216,000 barrels per day, climbing to a record 13.93 million barrels per day. This pressure from the supply side is a key reason for the deeper-than-expected price decline.

Additionally, the notable increase in tanker traffic through the Strait of Hormuz last week sparked optimistic market expectations. Rystad Energy assesses that Middle Eastern crude supply is recovering faster than anticipated, with a full recovery in crude flows now expected by year-end—a full quarter earlier than previous forecasts. By mid-June, the outage volume had decreased from a recent estimate of 11.7 million barrels per day to 9.6 million barrels per day, implying a supply recovery of about 2 million barrels per day within three weeks.

While crude prices have fallen back to pre-conflict levels driven by supply recovery expectations, refined product prices in Europe and the US remain elevated, a situation that has drawn criticism from former President Trump, who has stated a goal to bring gasoline prices down to around $2.50 per gallon. The current national average is approximately $3.86 per gallon.

Progress on navigation through the Strait of Hormuz remains critical. Although US envoys and Iran's foreign minister are in Qatar, Qatari officials stated on Tuesday that no high-level meetings between the US and Iran were planned in Doha that day. The failure of talks to proceed as anticipated has heightened market vigilance. Iran's foreign ministry stated there are no meetings scheduled with the US in the coming days, with Iran taking a firm stance on maintaining its rights over management of the Strait. The divergence between the US and Iran remains stark.

With the initial reports of a Tuesday meeting in Qatar being disproven, the situation appears delicate. Following Iran's attack on a commercial tanker over the weekend, the number of vessels transiting the Strait has declined again. The market still largely believes the geopolitical contest between the US and Iran is relatively contained, but over time, the feasibility of implementing the memorandum's terms faces a test.

The current price action suggests supply pressure is outweighing the impact of falling inventories. If this persists until the supply increments begin to halt and reverse the inventory drawdown, it would be bearish news for oil prices. Prices have formed consecutive small candlesticks with declining volatility, indicating a market in wait-and-see mode amidst a weak backdrop, anticipating a final outcome. Attention to timing is advised, with cautious participation recommended.

Daily Market Movements

WTI crude oil futures fell $1.25, or 1.77%, to settle at $69.50 per barrel. Brent crude oil futures fell $0.96, or 1.30%, to settle at $72.95 per barrel. INE crude oil futures fell 1.17% to settle at 456.7 yuan.

The US Dollar Index rose 0.07% to 101.17. The Hong Kong Exchange USD/CNH rate fell 0.09% to 6.7565. The US 10-year Treasury note price fell 0.52% to 109.61. The Dow Jones Industrial Average rose 0.26% to 52,319.2.

Recent Key Developments

Iraq's SOMO Offers Deep Discounts on Basra Crude, Hormuz Transit Risks Still Deter Buyers

Iraq's State Oil Marketing Organization (SOMO) is offering substantial discounts to attract long-term buyers for July-loading Basra crude from Persian Gulf ports. Basra Medium crude is discounted by $14 to $16 per barrel, while Basra Heavy is discounted by $16.80 to $18.80. The discount tiers decrease with the loading window: largest for July 1-5, smaller for July 6-10, and smallest for July 11-31. Buyers must declare their purchase volumes within one day of receiving the notice.

This discounting is Iraq's latest promotional effort amid ongoing concerns over transit through the Strait of Hormuz. In May, SOMO offered discounts of up to $33.40 per barrel on Basra Medium. With the US-Iran interim peace agreement and the start of a 60-day free transit window for the Strait of Hormuz on June 23, Iraq is attempting to accelerate shipments during this window.

While tanker freight rates have retreated from their peak during the conflict, they remain elevated. Daily rates for Very Large Crude Carriers (VLCCs) on the Middle East-to-China route (TD3C) have fallen from around $600,000 in March to approximately $328,000, but are still several times higher than the pre-conflict level of around $50,000. The high shipping costs are a core reason for SOMO's significant price concessions to compensate buyers.

Despite the attractive discounts, the sustainability of safe transit through the Strait of Hormuz remains the primary concern for buyers. Industry assessments suggest transit risks in the second half of the year are not fully eliminated. Furthermore, Iran has indicated it will consider charging fees for transiting vessels after the 60-day free period, adding further uncertainty to long-term procurement.

Middle East Crude Supply Recovery Faster Than Expected

Middle East crude supply, disrupted by regional conflict, is recovering at a faster-than-expected pace. Rystad Energy now judges that crude flows will fully recover by the end of this year, a full quarter earlier than previously anticipated. By mid-June, the outage volume had decreased from a recent estimate of 11.7 million barrels per day to 9.6 million barrels per day, implying a supply recovery of about 2 million barrels per day within three weeks.

Following the US-Iran interim peace agreement signed on June 17 and the US announcement this week of a temporary 60-day lifting of sanctions on Iranian oil, Iran's production is expected to recover the fastest, with Saudi Arabia and the UAE likely to follow closely. The latter two have maintained exports via pipeline rerouting. Kuwait and Iraq's recovery progress is also ahead of earlier expectations.

However, the anticipated recovery still faces risks. If transit volumes through the Strait of Hormuz do not rebound, the limited buffer provided by current onshore storage capacity could push the recovery process back into next year.

UAE Oil Exports Hit Record High Post-OPEC Exit, Russian Exports Also Surge as Prices Fall

Preliminary ship-tracking data from Kpler and Vortexa shows the UAE boosted crude and condensate exports in June to a record high shortly after exiting OPEC. Kpler senior oil analyst Rauball noted that the UAE's crude and condensate exports averaged about 3.7 million barrels per day for the month, a historical record and significantly above the pre-conflict level of 3.1 to 3.3 million barrels per day. The UAE's previous export peak was 3.44 million barrels per day in April 2020 during the brief Saudi-Russia price war. Vortexa senior oil analyst Emma Li stated that loadings from Abu Dhabi reached 4.0 million barrels per day from June 1-29, exceeding the pre-conflict level of 3.4 million barrels per day. Exports also rose to a record 3.7 million barrels per day, compared to 3.3 million barrels per day in the first two months of the year.

Russia's crude oil exports are soaring to a record high, leading to a significant build-up of crude at sea, while prices for Moscow's key revenue source are falling sharply. According to compiled tanker-tracking data, Russia's seaborne crude exports rose to 4.13 million barrels per day on a four-week average to June 28. This is the highest level since the onset of the Russia-Ukraine conflict in 2022, after which a significant portion of Russian oil previously flowed via pipeline to Western Europe. The export surge means the volume of Russian oil stored at sea has increased by about one-third from the mid-April low, with cargoes accumulating near Egypt and Singapore, suggesting Moscow may face increasing difficulty placing all its volumes. The rise in exports coincides with Ukraine's ongoing attacks on Russian refineries, which may lead to crude that cannot be processed domestically being diverted for export.

EIA: US Crude Production Hit Record 13.93 Million Barrels Per Day in April

Monthly data from the US Energy Information Administration (EIA) released on Tuesday showed US crude oil production climbed to a record 13.93 million barrels per day in April, driven by higher prices from the Iran conflict and increased producer activity. EIA data shows April production increased by 216,000 barrels per day. Production in New Mexico hit a record high of 2.37 million barrels per day. Texas production edged up by 36,000 barrels per day to 5.83 million barrels per day, the highest since last November. Texas and New Mexico share the Permian Basin, which accounts for roughly half of total US crude output. Production in North Dakota, the third-largest producing state, rose to 1.13 million barrels per day, also the highest since last November.