- The Royal Bank of Canada (RBC) points out that the current global crude oil market trends are severely diverging from actual supply conditions. The market's expectations for a US-Iran agreement are overly optimistic, ignoring the reality of record global inventory depletion.
- Driven by geopolitical negotiation sentiments, Brent crude oil fell by more than 19% in May, and West Texas Intermediate (WTI) crude oil dropped nearly 17% during the same period. However, structural risks on the supply side have not been fundamentally alleviated.
- The harsh conditions proposed by the Trump administration make negotiations unpredictable. Even if a short-term 60-day ceasefire memorandum (MOU) is signed, due to the triple obstacles of logistics and insurance sanctions, the capacity of the critical Hormuz Strait is unlikely to recover in the short term.
Market Trading Narratives Severely Diverge from Geopolitical Realities
Helima Croft, head of commodity research, points out that the current oil price trends reflect a collective market misjudgment of reality. On May 29, Eastern Time, U.S. President Trump stated that a final decision on the Iran conflict would be made in the White House Situation Room. On that day, WTI crude oil closed down 1.73% at $87.36 per barrel, and Brent crude oil closed down 1.77% at $92.05 per barrel. Although the U.S. reportedly reached a framework for a 60-day memorandum, it still awaits Trump's final signature, and most of the harsh conditions he listed have been rejected by Tehran. The market views any agreement rumors as breakthroughs but selectively forgets the ongoing diplomatic stalemate and repeatedly escalating military frictions. Hours after the latest decline, Iran again launched missiles at uncoordinated ships, and the U.S. military intercepted an Iranian drone in the strait, indicating that geopolitical risks remain high.
Key Inventory Depletion May Reach Historic Lows by Fall
The deterioration speed of fundamental indicators far exceeds that of sentiment. As supply disruptions enter the third month, RBC estimates show that if the current six-week average consumption rate continues, the inventory coverage days measured by onshore crude oil inventory compared to refinery processing volume may drop to the 30 to 40-day range before October. This would be the lowest level since the institution established its data set in 2016. Once this threshold is breached, logistical bottlenecks and raw material shortages will jeopardize the operation of the refining industry. The initial impact is buffered by initial inventories and the release of strategic petroleum reserves (SPR), but these shock absorbers are rapidly depleting. Inventory depletion will accelerate further in the coming weeks, and due to limited visibility of some data, the actual supply-demand situation may be tighter than known data suggests.
Logistical and Insurance Sanctions Pose Triple Obstacles to Channel Restoration
Even if the U.S. and Iran eventually sign an agreement, the Hormuz Strait is unlikely to achieve rapid recovery. From an operational perspective, initial transit is likely to be primarily one-way, significantly increasing the complexity of clearing the channel. Facing ongoing security threats from missiles, drones, and mines, Western shipping companies are unlikely to risk returning to the channel based solely on a 60-day memorandum. Extremely high insurance rates and compliance risks involved in paying entities related to the Iranian Revolutionary Guard Corps (IRGC) under the sanctions framework further limit shipowners' options. Currently, the UAE is accelerating the construction of alternative land networks, and Saudi Arabia is increasing the use of the East-West pipeline, reflecting that Gulf countries are actively adjusting their energy transportation strategies.
Tehran's Internal Strategic Considerations May Keep Supply Side Under Pressure
From a strategic perspective, hardliners within Tehran may prefer to maintain a stalemate that is neither fully at war nor truly reconciled. As the summer demand peak approaches, inventory declines will increase Iran's bargaining power at the negotiating table. Although dual sanctions have clearly pressured its finances, Tehran can still export sanctioned oil and earn transit fees through exemption mechanisms. If core inflation rises again due to a rebound in energy prices, macro market pricing may face reevaluation. Overall, the window to reopen the strait and avoid a hard landing is rapidly narrowing, and June to August will pose a severe stress test for the crude oil market.
