Crude Oil Prices Slump on Limited Escalation of US-Iran Conflict

August WTI crude oil (CLQ26) on Thursday closed down -1.44 (-1.96%), and August RBOB gasoline (RBQ26) closed down -0.0647 (-2.00%).

Crude oil and gasoline prices gave up an early advance on Thursday and fell sharply on speculation the escalation of hostilities between the US and Iran will be limited.  Crude prices initially moved higher on Thursday after the US attacked Iranian targets for a second day in response to Iranian attacks on shipping in the Strait of Hormuz. 

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Crude prices fell Thursday after the US refrained from attacking any of Iran’s energy infrastructure. Also, comments from President Trump eased concerns about an escalation of the conflict when he said he does not want a return to full-scale war, bolstering speculation that shipping flows through the Strait of Hormuz will soon recover.

Crude prices initially rallied on Thursday after the US military struck Iran for a second day, hitting about 90 Iranian targets to degrade the country’s ability to attack commercial shipping in the Strait of Hormuz.  Iran responded by targeting US bases in Bahrain, Kuwait, and Qatar with drones and missiles.

Crude prices posted a 4.25-month low last Thursday as the recovery in oil flows through the Persian Gulf accelerated, sparking concerns of a supply glut.  According to data compiled by Bloomberg, Saudi Arabian crude exports have risen to 6.3 million bpd, or 90% of pre-war levels.  Also, the UAE ramped up shipments of crude oil and condensates by 30% in June to more than 3.9 million bpd, restoring its oil exports to pre-war levels.

Stronger Russian crude exports are also adding to global oil supplies, which is bearish for prices. Data compiled by Bloomberg show the four-week average of Russian crude exports rose to 4.13 million bpd through June 28, the highest since Russia invaded Ukraine in 2022.  Russia may be boosting its crude exports as the country’s refining capacity has plunged due to damage at its refining facilities from Ukraine drone and missile attacks.

Crude prices have support from the continued Ukrainian drone attacks on Russian oil infrastructure.  According to EA Analytics, Russian crude-processing rates averaged 4.32 million bpd in the first 10 days of June, the lowest in 20 years, amid damage to Russian energy infrastructure caused by drone and missile attacks from Ukraine.  According to Bloomberg, Ukrainian forces have attacked Russian fuel-producing facilities more than 50 times this year, compared with 82 for all of 2025.  As of the end of June, around 90% of Russian regions have imposed some form of fuel rationing or reported supply issues, as refining capacity has plunged following damage to facilities.  The strikes have deepened a nationwide gasoline shortage, with several major refineries shut down and the government banning almost all gasoline, jet fuel and diesel exports.  Russia is the world’s number two diesel exporter, after the US, according to Vortexa. 

The International Energy Agency (IEA) warned on June 17 that the Iran war’s impact on global oil demand will be much deeper than previously anticipated, saying world oil consumption will decline by -1.1 million bpd this year, a larger drop than a previous estimate of -420,000 bpd.

The outlook for higher US crude output is negative for oil prices.  The Department of Energy (DOE) on Tuesday raised its US 2026 crude production estimate to 13.78 million bpd from a June estimate of 13.72 million bpd.

As a bearish factor for crude, OPEC delegates said on May 14 that the cartel aims to continue a series of oil quota increases over the next few months, completing the return of halted oil production by the end of September.  The group already formally agreed to restore about two-thirds of the 1.65 million bpd supply cutback it made back in 2023 and said it plans to raise output targets further and to revive the final portion in three more monthly stages.  On Sunday, OPEC+ said it will boost its crude output by 188,000 bpd in August, though that increase might prove difficult, as Middle East producers are still restarting output curtailed by the war in the region.  OPEC’s June crude production rose by +2.34 million bpd to 18.75 million bpd. 

Vortexa reported on Monday that crude oil stored on tankers that have been stationary for at least 7 days rose +39% w/w to 112.1 million bbl in the week ended July 3.

Wednesday’s EIA report showed that (1) US crude oil inventories as of July 3 were -6.6% below the seasonal 5-year average, (2) gasoline inventories were -6.9% below the seasonal 5-year average, and (3) distillate inventories were -13.4% below the 5-year seasonal average.  US crude oil production in the week ending July 3 rose +0.4% w/w to 13.860 million bpd, just below the record high of 13.862 million bpd posted in the week of November 7.

Baker Hughes reported last Thursday that the number of active US oil rigs in the week ended July 3 rose by +5 rigs to a 13-month high of 445 rigs, up from the 4.25-year low of 406 rigs posted in December 2025.  However, the number of US oil rigs remains sharply below the 5.5-year high of 627 reported in December 2022.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com