Oil prices ended lower Tuesday after an exceptionally volatile session in which WTI briefly surged above $110 per barrel and Brent approached $112 as escalating tanker attacks in the Strait of Hormuz collided with renewed hopes for U.S.-Iran diplomacy.
MONTREAL (Oil Monster): Crude oil prices retreated Tuesday after surging to multi-month intraday highs, highlighting the extreme volatility now running through global oil markets as traders balance escalating Middle East shipping risks against renewed diplomatic efforts involving Iran.
U.S. West Texas Intermediate crude for November settled down $1.87, or about 1.8%, at $101.79 per barrel on its final trading day.
The contract had climbed as high as $110.48 earlier in the session, producing an intraday reversal of nearly $9 per barrel.
The more actively traded December WTI contract settled at $97.82 per barrel.
December Brent crude settled at $108.79 per barrel after touching a session high of $111.99.
Prices initially surged as traders reacted to another escalation in attacks on commercial shipping around the Strait of Hormuz.
At least 18 vessels have come under attack during the past two weeks, according to shipping data provider Kpler.
The incidents have reinforced concerns about the reliability of one of the world's most important oil and gas transit corridors.
Iran's Islamic Revolutionary Guard Corps said Tuesday that two "non-compliant" oil tankers had caught fire after striking mines placed by its naval forces along a route Tehran considers unauthorized.
The vessels were not identified, and independent confirmation of the reported incidents was not immediately available.
Iranian Foreign Ministry spokesperson Esmaeil Baqaei also warned that Tehran would respond forcefully to any new U.S. military action.
The oil rally lost momentum later in the session as traders assessed another attempt to revive diplomatic negotiations.
Iranian President Masoud Pezeshkian met Pakistan's army chief, Field Marshal Asim Munir, in Tehran as Pakistan continued efforts to mediate between Iran and the United States.
The possibility of renewed diplomatic progress helped reduce some of the geopolitical risk premium that had driven crude sharply higher earlier in the day.
However, the continuing attacks on tankers and infrastructure mean the physical supply risks facing the market have not disappeared.
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Tuesday's unusually large move in front-month WTI was also amplified by the expiration of the November futures contract.
Trading near a contract expiration can become more volatile as market participants close positions or move them into later months.
The December contract traded substantially below November WTI, illustrating the unusual tightness at the front of the U.S. crude futures curve.
PVM Oil Associates analyst Tamas Varga said the strength in front-month WTI reflected tight physical crude conditions alongside declining Middle East export availability.
Repeated tanker attacks and strikes on Saudi Arabian infrastructure have complicated the recovery in Gulf oil exports.
Producers have increasingly relied on alternative export routes, tanker shuttle operations and ship-to-ship transfers to keep crude moving around disrupted areas.
Those workarounds have allowed significant volumes to continue reaching international markets, but they are slower and more expensive than normal trading routes.
The additional demand for vessels has also contributed to unusually high tanker freight and insurance costs.
The $110 WTI headline does not tell the whole story. The November contract was expiring Tuesday and traded almost $13 above the December contract at its intraday peak.
The more useful signal is that the market continues to price immediate physical barrels more aggressively than later supply while tanker availability, Middle East exports and security around Hormuz remain uncertain.
Another factor traders are watching is Washington's effort to increase the number of tankers available for legitimate oil trades.
The Trump administration has been considering sanctions relief that could allow some previously sanctioned shadow-fleet vessels to return to mainstream commerce when carrying non-sanctioned crude.
Energy Secretary Chris Wright has said the objective is to allow legitimate operators to acquire some sanctioned vessels and use them for lawful trade.
The policy could potentially add tanker capacity and ease freight pressure, although shipping analysts caution that the impact may be limited.
Kpler estimates that only about 24 of roughly 160 U.S.-sanctioned supertankers may be realistic candidates for a return to mainstream operations because of ownership, age, insurance and technical constraints.
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Any meaningful decline in tanker costs could improve the competitiveness of U.S. crude in international markets.
Exceptionally high freight rates have recently made long-haul U.S. barrels less attractive to Asian refiners compared with geographically closer Middle Eastern supplies.
If additional tanker capacity reduces shipping costs, U.S. crude could regain some of that competitiveness.
Varga said lower freight costs could put American crude grades back into consideration as replacements for disrupted Middle Eastern barrels.
The potential shift highlights how tanker economics have become increasingly important in determining global crude flows.
Traders are also awaiting the latest U.S. petroleum inventory data.
Market expectations point to a decline in commercial crude stockpiles during the latest reporting week.
Lower inventories would provide another sign of tight near-term physical supply, particularly at a time when refinery demand remains strong and international crude flows face logistical constraints.
Tuesday's trading illustrated the opposing forces now driving crude prices.
Tanker attacks, Middle East export disruptions, declining inventories and high transportation costs continue to support prices.
At the same time, diplomatic initiatives involving the United States and Iran, potential sanctions relief for additional tankers and recovering oil flows provide reasons for traders to limit the geopolitical premium.
The result is a market capable of moving several dollars per barrel within hours as new security or diplomatic headlines emerge.
With the November WTI contract expiring Tuesday, attention now shifts to December futures.
That contract settled at $97.82, significantly below the expiring November contract and well below Tuesday's $110.48 front-month peak.
The spread is an important reminder that extraordinary moves in an expiring futures contract should not automatically be interpreted as a comparable change in the broader oil market.
Going forward, December WTI and December Brent will provide cleaner benchmarks for determining whether Middle East supply concerns are producing a sustained increase in crude prices or primarily short-term volatility.
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Courtesy: www.cnbc.com
