Oil Selloff Outruns Reality in Hormuz

Crude oil prices took a nosedive in recent weeks, with WTI futures falling 3.61% to $83.51 by late Thursday. The market initially opened near its weekly high of $86.57 but quickly dropped to $79.62 after reports emerged of a potential deal between Iran, Oman, and the United States for shipping through the Strait of Hormuz. However, the situation quickly changed when Iran fired on a vessel near Oman and President Trump rejected terms that would have revived the Iran ceasefire agreement.

The market began to focus on the fact that no final deal had been reached, rather than the potential reopening of Hormuz.

While the agreement between Iran and Oman was announced, it was described as still "not final" by Iran's Revolutionary Guards. Iran reportedly demanded the end of the regional conflict, sanctions relief, an end to the port blockade, and compensation before allowing ships to use the central channel. The United States did not agree to these conditions, stating that Washington was not returning to the prior ceasefire terms.

Tanker traffic through Hormuz showed improvement, with ten commodity vessels passing through on Wednesday, up from eight the previous day. However, this still fell short of the 10-day average of 15. Additionally, a vessel was struck while attempting to move through the area on Thursday. Actual oil flows were also found to be lower than expected, with only 2.3 million barrels per day moving through Hormuz in August, compared to the 4.26 million barrels per day seen during the strongest week before the war.

Imports of crude oil to Asia, which would confirm a genuine reopening of Hormuz, were running at 23.12 million barrels per day in August, down from 23.36 million in July and far below the prewar average of 26.91 million barrels. India's Middle East oil imports were approximately half of prewar levels. The Energy Information Administration (EIA) report showed a 100,000-barrel increase in commercial crude inventories, but this was small compared to the 435,000-barrel daily drop in crude imports.

Gasoline inventories fell 2.5 million barrels and were 6% below the five-year average, while distillate inventories dropped 2.2 million barrels and were 14% below average.

Despite the decline in imports, refinery activity remained high, with U.S. refineries operating at 97.4% of capacity, near the peak of the seasonal range. However, fuel inventories still declined, raising further questions about the validity of the bearish outlook based solely on crude inventories. The bearish side of the market was driven by lower demand, with total products supplied over the past four weeks averaging 20.5 million barrels per day, down 3% from a year ago.

Gasoline supply decreased by 1.1%, distillate demand dropped by 2.2%, and jet fuel demand fell by 2.3%.

Technical analysis indicated that the weekly October WTI crude oil futures contract was lower for the week, but the market had bounced from the $79.62 level, demonstrating respect for the intermediate 50% level at $79.20. Overcoming the 61.8% retracement level at $82.05 would suggest that short-covering was strengthening. However, this only presented a range-bound trade, with another bullish catalyst needed to push the market above $88.07 and into $91.27.

If the $79.20 support level failed, the market could decline further into the long-term retracement zone between $73.40 and $69.18.