Oil rally hinges on Trump's Hormuz deadline; WTI to remain bullish

The sentiment in the crude oil market is expected to remain mildly bullish, according to experts as geopolitical tensions continue to simmer in the Middle East. 

On Tuesday, the price action for West Texas Intermediate crude oil was highly divergent between the spot and futures markets.

Specifically, May futures surged to over $115 a barrel and maintained that level at the time of writing.

Geopolitical escalation over the Strait of Hormuz

Oil prices saw further gains on Tuesday, driven by elevated tensions between the US and Iran. 

Specifically, US President Donald Trump escalated his strong rhetoric, threatening more aggressive action should Iran fail to reopen the Strait of Hormuz.

Trump has issued a stern threat to Tehran, warning of "hell" if they do not meet his deadline of 8 p.m. EDT Tuesday to reopen the strait.

The president warned that Iran "could be taken out" and promised "further action" if an agreement is not secured by the deadline.

Tehran, responding to a US proposal mediated by Pakistan, rejected the idea of a ceasefire.

Instead, Iran insisted that a permanent conclusion to the war was required, while also pushing back against demands to reopen the Strait of Hormuz. 

Iranian forces had effectively closed this vital waterway—which typically handles around 20% of the world's oil flows—following the commencement of US and Israeli attacks on February 28.

This closure has eliminated an estimated 17 to 18 million barrels per day of oil from the strait's usual transit flows.

Regional hostilities

According to Tim Waterer, chief market analyst at KCM Trade, the countdown to Trump's ultimatum deadline is currently causing "clock-watching" to be almost as significant a factor in oil markets as the underlying fundamentals.

"The potential for a ceasefire deal offers some counterweight and could spark a relief move lower if it gains traction, but persistent supply ​worries from the Hormuz chokepoint and damaged energy facilities are keeping the floor under prices," he was quoted as saying in a Reuters report. 

Diplomats indicated that the UN Security Council's vote on Tuesday concerning a resolution for the protection of commercial shipping in the Strait of Hormuz is expected to be on a significantly weakened version.

This follows objections from veto-wielding China to the authorization of force.

Meanwhile, regional tensions persisted with reports of continued attacks.

In Syria, explosions were heard in and around the capital, Damascus, on Tuesday, which Syrian state TV attributed to the Israeli interception of Iranian missiles.

Separately, Saudi Arabia's defence ministry reported on Tuesday that it had intercepted and destroyed seven ballistic missiles launched towards its Eastern Region.

The ministry noted that debris from these missiles fell near energy facilities.

Widening gap and OPEC+ decision

The ongoing conflict has significantly impacted global crude markets.

Spot premiums for US WTI crude have hit unprecedented highs as Asian and European refiners urgently seek alternative supplies, responding to disruptions in Middle Eastern oil flows.

“The widening gap between spot and front-month futures reflects the extreme backwardation gripping crude oil markets, with traders pricing a significant near-term delivery premium tied directly to Tuesday's deadline,” FXStreet said. 

Reflecting this market pressure, Saudi Arabia's state oil company, Aramco, increased the official selling price for its Arab Light crude destined for Asia for May delivery. 

This adjustment set a new record premium of $19.50 a barrel over the Oman/Dubai average.

Meanwhile, OPEC+ members have increased their production quotas for May, a decision made despite — and likely because of — constraints on production and shipments from several of the alliance's major producers due to the ongoing conflict. 

The alliance issued a warning that the damage inflicted on Middle East energy infrastructure is expected to cause a sustained, long-term impact on global supply, even after hostilities cease.

OPEC+ approved an increase of 206,000 barrels per day to oil output quotas for May on Sunday. 

However, this production boost is expected to be largely symbolic, as major members are unable to increase their output due to export limitations caused by Strait closures.

The increase marks a continuation of the gradual unwinding of the 1.65 million barrels per day of cuts introduced in April 2023, following a pause in the first quarter. 

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