Crude Oil Monthly Report: Deadline Approaching, "TACO" Becomes the Biggest Suspense

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Source: Energy Research Center

Summary

● Market Review: As of March 31, the main WTI crude oil futures contract closed at $101.38 per barrel, with a monthly increase of 42.33%; the main Brent crude oil futures contract closed at $103.97 per barrel, with a monthly increase of 33.74%; the main INE crude oil futures contract closed at 745.1 yuan per barrel, with a monthly increase of 45.81%.

● Global crude oil supply-demand gap has shifted from surplus to shortage: Due to the ongoing conflict between the U.S. and Iran, crude oil shipments from the Middle East have been disrupted. In addition, only Saudi Arabia and the United Arab Emirates can conduct quantitatively scheduled crude oil shipments via pipelines. Even with detours, their shipping volumes are only around 7 million barrels per day, which is still far from enough compared with the strait’s usual 20 million barrels per day of oil trade. According to the EIA’s February monthly report, the expected crude oil supply shortfall in March will reach 1.88 million barrels per day; this estimate is relatively optimistic, and we believe the real supply shortfall will be higher than the EIA’s expectation. At present, based on Citrini’s research report, navigation conditions through the strait have improved, but they are still far below normal trade flows before the U.S.-Iran conflict.

● The U.S.-Iran conflict is the market’s core pricing anchor: The U.S.-Iran conflict has been ongoing for 37 days since it started on February 28. As time goes on, the problem of a global crude oil supply shortage is becoming increasingly severe. According to the latest market news, it is expected that the U.S. and Iran may be able to reach a temporary ceasefire agreement within 48 hours. But given that the U.S. and Iran still have major disagreements over the terms of the agreement, we believe the likelihood of signing ceasefire terms in the short term is low. If ceasefire talks fail in countries such as Pakistan and Turkey, the U.S. will announce an escalation of hostilities on Tuesday (Wednesday at 8:00 a.m. Beijing time), and will formally strike Iran’s energy and civilian infrastructure. Oil prices may be pushed up quickly. We expect crude oil prices in April to remain in a relatively high range of volatility, and we recommend investors participate with caution.

● Outlook: 1. The decision made by Trump regarding Iran on April 7 (U.S. time); 2. The intensity of Ukraine’s strikes on Russia; 3. The actual navigability of the Strait of Hormuz; 4. The scale of the next release of oil reserves by the international demand countries.

I. Market Review

This month’s oil prices surged sharply, and geopolitics became an absolute pricing anchor. In March, geopolitics was undoubtedly the biggest anchor that the market focused on. Since the U.S. launched a war against Iran with Israel on February 28, fighting has continued to spread throughout March and has shown an increasingly “out-of-control” trend. As of March 31, WTI front-month closed at $101.38 per barrel; Brent front-month closed at $103.97 per barrel; and domestic SC crude oil front-month closed at 745.1 yuan per barrel. International oil prices all rose noticeably. Meanwhile, during the month, Trump repeatedly made “TACO” remarks about the U.S.-Iran conflict, causing oil prices to experience large fluctuations while remaining at elevated levels overall. As the conflict unfolds, the market’s focus has shifted to the final decision that U.S. President Trump will make on April 7. Before that, long and short positions have been intertwined, but the bulls still firmly believe that the U.S., Iran, and Israel all have bottom lines that are difficult to resolve (issues such as strait jurisdiction, compensation, and enriched uranium, etc.), and that a U.S.-Iran ceasefire agreement cannot be realized. The bears, however, believe Trump is rushing to announce “victory” as the deadline approaches for midterm elections and for the presidency’s permission to conduct short-term wars, and that he is eager to extricate himself from the Middle East. Given that Trump’s actions are difficult to predict, as of early April, offensives by both sides in the U.S.-Iran conflict have still been escalating. The wording from the Revolutionary Guards remains relatively hardline. We expect negotiations will not have a very smooth progress, but we also cannot rule out the possibility that Trump forcefully announces an end to the conflict. At the same time, as the March crude oil month spread strengthened significantly, it shows that the physical market still sees a relatively tight supply. Combined with March CFTC positioning data, traders have remained fairly active in purchasing crude oil. If the conflict escalates, there is a possibility that the strait could be completely closed again, which would further widen the month spread. But if Trump announces de-escalation or continues to extend the deadline, considering that navigation conditions have already improved noticeably, the month spread may gradually decline afterward.

II. Global Crude Oil Supply-Demand Gap Has Shifted from Surplus to Shortage

As of the end of March, U.S. crude oil production has still been running at a high level. Considering that U.S. shale oil producers have been cautious about short-term price fluctuations, if crude continues to rise, producers may consider increasing output. At present, producers have no strong incentive to ramp up production; instead, they are more inclined to lock in higher revenues through hedging at the current high prices. On the import/export side, imports fell slightly at month-end while exports surged significantly, leading to a substantial expansion in net exports. This reflects additional volumes expected to be shipped out of the U.S. Gulf Coast (USGC) due to the release of 1 to 1.5 million barrels per day from the U.S. strategic petroleum reserves (SPR). Because oil prices are high and the M1-M4 spread of NYMEX West Texas Intermediate (WT1) futures is at a spot premium, exports are still expected to be higher than the historical average. U.S. crude oil end demand (refinery throughput/utilization) rose noticeably at the beginning of March when the cracking spread boosted it, but as the cracking spread later fell back, crude end demand declined in tandem. For downstream refined products, refined product demand saw a sharp drop by the end of March, mainly because the U.S. economy has been relatively weak and it is not currently the peak season for gasoline and diesel consumption in the U.S. It is worth noting that at the end of this month, U.S. strategic reserves recorded the first decline since the beginning of the year. Compared with early February, U.S. crude oil strategic reserves fell by a total of 378,000 barrels.

According to the EIA’s February monthly report, the expected global supply-demand gap in March is -1.88 million barrels per day, but the actual situation may be even tighter than the EIA expects. Going forward, it is still necessary to track the latest EIA monthly report data to judge the global supply-demand pattern. But if navigation through the strait remains blocked and the U.S.-Iran conflict continues to escalate, the problem of supply tightness is expected to be further amplified.

According to a statement on the OPEC website: Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman decided to implement a production adjustment of 206,000 barrels per day out of the additional voluntary production cuts of 1.65 million barrels per day announced for April 2023. The adjustment will be carried out in May 2026. Depending on changes in market conditions, the 1.65 million barrels per day cutback scale can be gradually made up partially or entirely. The countries will continue to closely monitor and assess market conditions, and in efforts to consistently support market stability, they will reaffirm the importance of adopting a prudent strategy, while also retaining sufficient flexibility to proceed with the exit process for adding, pausing, or reversing voluntary production cuts, including reversing the voluntary production cut measures of 2.2 million barrels per day previously announced in November 2023. However, most of OPEC+’s production increase plans are mostly theoretical at the level of assumptions. Russia has spare capacity to increase production, but because its export ports have been bombed, the likelihood of increased output is weakened. And for Middle East OPEC member countries, due to limited shipping capacity, their production increase plans exist only at a theoretical level.

So far, Gulf member states have been facing forced production cuts due to shipping and storage capacity issues. According to the IEA’s March monthly report, Middle East Gulf countries have already reduced their total oil production by at least 10 million barrels per day. As of now, OPEC has not yet disclosed its member production data for March, but it is expected to be reduced significantly as well. If, going forward, Houthi attacks escalate and Iran increases its strikes against the energy and shipping facilities of the UAE’s Fujairah, Gulf countries still have room to cut production further. The following are OPEC’s official data as of February:

Global offshore floating storage continues to rise. The increase in vessels staying for more than 7 days is nearly 20 million barrels. Looking at floating storage by vessel detail, it is mainly Middle East and Iranian oil, with floating storage concentrated near the Middle East Gulf and the Yellow Sea. Within the Middle East Gulf, floating storage mainly increases as the duration of the strait blockade lengthens. Iranian oil moves east toward areas near the Yellow Sea while waiting for Asian buyer instructions due to allowances for passage. Global onshore oil inventories continue to fall. Over the past week, in-transit inventories declined by more than 30 million barrels, and some of those quantities have been converted into floating storage. Moreover, onshore inventories in the Middle East have been relieved in terms of accumulation thanks to pipeline exports substituting for other channels. More importantly, since the outbreak of the conflict, the rate of inventory consumption has been accelerating, raising hidden concerns for the industry side. Global offshore in-transit inventories have been falling mainly because, in data statistics, the increase in floating storage leads to volumes being excluded from the in-transit range. Meanwhile, Middle East exports have been blocked, and the volume of oil eastbound in transit has fallen sharply, causing in-transit inventories to decline more quickly. Russia’s in-transit inventories have also declined somewhat, helped by imports from India that allow it to absorb supplies.

Currently, Middle East ports still include Iran’s Kharg Island, Saudi Arabia’s Yanbu port, and the UAE’s Fujairah port, which can handle oil loading and shipment relatively smoothly. According to Kpler weekly data, Yanbu generally maintains a weekly average loading level of 2 to 5 million barrels per day, but because there have recently been many tankers heading to Yanbu, the port has become more congested, and overall loading levels have slightly declined. The UAE’s Fujairah port has not suffered from congestion issues, but its biggest problem is that it is frequently targeted by missile strikes from Iran’s Islamic Revolutionary Guard Corps. Its loading volume, in the range of 1 to 3 million barrels per day, is not stable. Iran’s Kharg Island has not been affected by the conflict and can still generally reach a weekly average loading level of around 1 million barrels per day. If the conflict escalates, it is possible that all three ports capable of shipping could become unable to operate continuously. Fujairah could face more forceful retaliation from Iran; Yanbu could be affected by Houthi forces’ blockade of the Strait of Mandeb; and Kharg Island would become a key target for U.S. strikes. Overall shipment conditions still need to be tracked further as geopolitical developments evolve.

Currently, as the U.S.-Iran conflict escalates, Russia’s crude oil has temporarily had its blockade lifted, but this is extremely unfavorable for Ukraine. In order to prevent Russia from further supplementing its finances, Ukraine has carried out large-scale attacks in March on Russia’s refining and shipping facilities. The most affected are Russia’s major oil export port Primorsk and Ust-Luga. Between the two, Ust-Luga has suffered greater damage, indicating a clear decline in shipments at the Ust-Luga port. Although some pipeline diversion can still be achieved, it will still affect Russia’s shipment volumes of several hundred thousand barrels per day.

III. Geopolitical Disputes Remain the Monthly Trading Anchor

Geopolitical disputes remain the trading anchor for this month, but no one can make a deterministic forecast about how future conflicts will unfold in response to Trump’s multiple “TACO” remarks. Although there is no single deterministic storyline, we can map out several possible development trends:

1. U.S.-Iran ceasefire leads to crude oil giving back the geopolitics premium. As of April 6, the mainstream view in the market is that “the U.S. and Iran will finalize an initial ceasefire agreement within 48 hours. The proposed ceasefire agreement includes: Iran gives up nuclear weapons in exchange for sanctions relief and frozen assets being unfrozen. A plan to end hostility in the Middle East must be agreed upon before Monday. If the plan is agreed, it will lead to an immediate ceasefire, the reopening of the Strait of Hormuz, and a final agreement to be reached within 15 to 20 days.” After the news broke, both WTI and Brent prices fell together, indicating that the market has given some recognition to this information. At the same time, later comments from an Iranian foreign ministry spokesperson also said, “Iran is prepared to respond to the mediator’s request, and if necessary it will promptly inform [them].” If this information is true, then after subsequent announcements by the U.S. and Iran officials, Brent is expected to give back about $10 per barrel of geopolitics premium. But this scenario still has many unreasonable elements. First, since the war began, Iran’s foreign ministry has issued many “de-escalation” statements. Also, Iran’s foreign minister Abbas Araghchi and President Masoud Pezeshkian do not have actual military decision-making authority. After the Iran-Iraq war, domestic military leadership mainly rested with the Revolutionary Guards. So after Hamenei and Larijani were killed, internal voices within Iran were not unified. Second, the agreement clearly shows that both sides have made concessions, but the U.S. still requires reopening the Strait of Hormuz. We believe that under the current situation where Iran holds the advantage, it would not easily hand over control of the strait and would not give up its enriched uranium stockpiles. Therefore, we still have doubts about the likelihood that the U.S. and Iran reach a ceasefire agreement within 48 hours.

2. Talks set up a backdrop for attacks, and the U.S.-Iran conflict is officially escalated. Within 48 hours, U.S. President Trump will escalate the conflict and carry out further strikes against Iran’s energy and civilian infrastructure, such as: power plants, oil production and shipping facilities on Kharg Island, and other bridges inside Iran, etc. If the conflict escalates, Iran is expected to make a matching retaliation, and then energy facilities across the Middle East would all be targeted. The Houthis may also close the Strait of Mandeb, and with escalation, the Strait of Hormuz is expected to close again. (For reference, when Geshm Island was bombed, the navigation route to Iran’s Larak Island was closed.) At that time, Brent crude oil prices could quickly surge into the $130–$150 per barrel range.

3. The Venezuela model reappears—U.S. tries to achieve a quick resolution. The U.S. has chosen to deploy ground forces; currently U.S. ground forces such as the SEAL Team, the 82nd Airborne Division, and other elite units have already been fully deployed in the Middle East, and the Ford-class aircraft carrier will also arrive in the Middle East in the following days to complete deployment. Referring to the past action histories of elite units such as the Rangers and SEAL Team involved in this deployment, the possibility of the U.S. replicating the Venezuela model and carrying out special operations is highest. There could be the following possible targets: 1. Seizing Kharg Island; 2. A ground landing in Balochistan; 3. Conducting the capture of Mujtaba or an attack or retrieval of enriched uranium. In addition, on March 28, according to a report by the Stars and Stripes (a military newspaper operated by the Pentagon), the Pentagon requested “prefabricated shelters that can be quickly transported to the Middle East,” with estimated delivery times of 3 days, 15 days, and 30 days. All options must be able to deliver cargo to the King Hussein International Airport in Jordan. Prefabricated shelters are also necessary equipment for U.S. military special operations, so we believe there is still a certain probability that special operations will be carried out; oil prices may surge to above $130 per barrel in the short term.

Overall, the situation is still unclear for now, and everything depends on waiting for the final waiting time set by U.S. President Trump. As of April 6, on that day oil prices fell rapidly due to market-reported negotiation news, but we have not seen a very convincing official statement or ceasefire terms. Referring to the U.S.’ diplomatic efforts at the time before attacking Iraq, we do not rule out that this “diplomatic effort” is set up as a prelude to escalating the war.

IV. Outlook

Geopolitics will still be the biggest variable this month, and trading should be careful of Trump’s decision on April 8. Going forward, crude oil in April is expected to continue to experience wide-range volatility. There remains the possibility of escalation of hostilities and expansion of attack targets by both sides in the U.S.-Iran conflict, which could push oil prices up in a non-linear way. If the Houthis formally block the Strait of Mandeb, or if Iran launches major strikes on the energy and shipping facilities of other Middle East countries, oil prices could see the possibility of being pushed up non-linearly. But if Trump insists on ending the war, then on April 8 or after forcibly declaring “victory,” strait jurisdiction would officially belong to Iran and Oman, and the geopolitics premium on crude oil would be given back sharply.

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Responsible editor: Zhao Siyuan