The oil rally has unravelled, at least for now, as the world’s biggest nations have come together to reassure the markets and consumers, although they are yet to announce any concrete timebound action plan.
From nearly $120 a barrel in Monday’s Asian session, crude futures (CL) tied to the West Texas Intermediate (WTI) benchmark fell nearly 12% to just under $84 in early Tuesday trading in New York. Intraday, the futures contract had touched as low as $82.81, marking a swing of more than $35 between Monday and early Tuesday.
The Slump After the Spike: Oil prices began to spiral upwards after the U.S.-Israeli coalition and Iran launched airstrikes against each other in late February. With the Strait of Hormuz, which serves as a conduit for transporting crude oil and natural gas from the Persian Gulf region, closed amid the ongoing U.S.-Iran war, crude futures went from strength to strength.
After closing at $67.02 on Feb. 27, the CL contract began a steady climb over the subsequent week, adding 36% in the process before ending the week ended March 6 at $90.90. The upward climb accelerated on Monday, forcing the Group of Seven (G-7) nations to respond.
Coordinated Response in the Works? Rumors are adrift that the G-7 finance ministers would have a follow-on meeting on Tuesday, with reports suggesting that alliance could announce a coordinated release of 300 million to 400 million barrels of oil. If the speculation proves right, this would mark a record coordinated release and nearly double of the 182 million barrels released after the Russia-Ukraine war in 2022.
ING Commodities Strategists Warren Patterson and Ewa Manthey, however, see any potential strategic reserve release as a temporary fix, offering temporary reprieve. “It could put some pressure at the front end while offering support further along the curve, amid expectations that reserves will need to be replenished down the line,” the strategists said.
Trump Steps In: With the oil price spike threatening pain at the pump in the U.S., especially in a midterm election year, President Donald Trump could not but react. The president has said his administration would ease sanctions against some nations to rein in prices. ING strategists do not see any material impact from such a move. Although Trump did not elaborate on which nations he was referring to, Patterson and Manthey believe it could be Russia.
“Given that Russia has managed to circumvent sanctions relatively effectively in recent years, any easing will not materially increase supply,” they said.
Trump, however, has been sending mixed messages regarding the timeline of the war.
Speaking to the media in Florida, Trump called the war that has now gone on for 10 days as a “short-term excursion,” and said that he thinks it will end very soon, according to CNN. He, however, told House Republicans who gathered for a policy retreat that “We’ve already won in many ways, but we haven’t won enough.” He also said the U.S. “will not relent until the enemy is totally and decisively defeated.”
Hormuz Reopening Key: Trump had earlier said that the American Navy would protect ships in the Middle East, if necessary. In a post of Truth Social late Monday, the president said, “If Iran does anything that stops the flow of Oil within the Strait of Hormuz, they will be hit by the United States of America TWENTY TIMES HARDER than they have been hit thus far.”
ING said in a report that the return of oil flows through the Strait of Hormuz remains crucial. The longer the flows are constrained, the longer upstream production would be shut and the longer it would take to ramp up production once flows resume, it said.
