Oil prices extended their rally on Wednesday after the US and Iran traded fresh strikes overnight, with Brent and WTI both building on their biggest one-day gains in weeks. Diesel markets tightened further as traders questioned how much crude is really moving through the Strait of Hormuz, while the more closely watched EIA inventory report was due later the same day.
Fresh strikes deepen Middle East risk
Oil prices extended the previous session's surge on Wednesday as the United States and Iran traded fresh strikes overnight, deepening concern over a disruption to Middle East supply. Brent crude futures rose $1.03, or 1.1%, to $95.68 a barrel by 0605 GMT, while WTI crude climbed 61 cents, or 0.7%, to $90.83. Both contracts had already surged more than $4 on Tuesday, Brent's largest one-day gain since July 24 and WTI's largest since July 23.
The US said it launched a series of airstrikes against targets in Iran overnight, prompting a response from Tehran in the most serious escalation of the conflict between the two countries in weeks. Iran's Revolutionary Guard Corps said the strikes would further restrict traffic through the Strait of Hormuz, a waterway that before the conflict carried about one-fifth of the global oil consumed and which Iran has effectively closed to commercial shipping.
Tehran's forces also targeted a US military base in Jordan with ballistic missiles it claimed had killed a large number of US forces, while Iranian state media reported a drone attack on a US base in Bahrain. However, Jordan's military said its air defenses intercepted 10 of 13 ballistic missiles that entered its airspace, and two US officials said no American casualties had been reported so far. Kuwait separately said its armed forces were responding to hostile drone activity.
Diesel markets tighten as flows are questioned
The latest exchange followed a weekend flare-up in hostilities, the first since July, after Iran hit two tankers departing the Strait of Hormuz on Monday. According to ING analysts, Brent pushed back above $95 a barrel, its highest level in more than a month. The US energy secretary said 17 million barrels of oil flowed through the strait on Monday, the highest volume since the conflict began, though ship trackers have been estimating more modest flows.
Escalation in the region also dashed hopes for a recovery in refined product flows. The ICE gasoil crack traded to record highs of around $79 a barrel, while the US diesel crack traded well above $100 a barrel. Given disruptions to Middle East and Russian diesel exports, ING said middle distillate cracks are likely to remain highly elevated and volatile as markets move toward seasonally stronger demand.
Risk premium set to stay elevated
US crude inventories fell by 2.6 million barrels in the week ended August 28, according to data cited from the American Petroleum Institute, with the more widely followed EIA report due later Wednesday. According to Phillip Nova's Priyanka Sachdeva: "it is increasingly pricing the cost of an unresolved war". She added that until negotiations produce a lasting resolution and normal flows through the strait return, the risk premium in crude is likely to remain elevated.
Sources: Commodities & Futures News, Commodities Analysis & Opinion
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