Crude oil futures settled sharply lower Friday as traders bet on an eventual U.S.-Iran agreement to reopen the Strait of Hormuz, but analysts warned that the market’s optimism may be short-lived.
West Texas Intermediate crude fell 2.7% to $90.54 a barrel, and Brent crude dropped 2% to $93.09, according to market data.
“The oil market has definitely gotten the sense that President Trump wants this thing over,” said John Kilduff, a partner at Again Capital. However, he added that fears are increasing that the U.S. will “agree to anything to get it over with for a while so these prices can really come back down.”
Despite the price decline, the supply disruption remains severe. Kilduff noted that only a trickle of tankers is making it through the Strait of Hormuz, and the market has been drawing down storage stocks. “The cliff in my opinion is in the beginning of July. That’s when the real crunch should dawn,” he said.
The mixed signals on diplomacy were evident Friday. ANZ Research analysts said that while an Israel-Lebanon ceasefire raised hopes that one of Iran’s key conditions for a deal had been met, “there are few signs that the two sides are getting any closer.” President Trump said negotiations were in the final stages, but Iran’s Foreign Minister Araghchi said negotiations had stalled, the analysts noted.
Ritterbusch & Associates said in a note that the market appears more sensitive to occasional bearish headlines or optimistic comments from Trump than to the daily loss of supply. “Holding a long position that would be more appropriate to global oil fundamentals has been extremely difficult throughout the course of this war,” the firm said.
On the supply side, U.S. drilling activity continues to climb. Baker Hughes reported that the number of oil rigs increased by two to 431 this week, the sixth straight weekly gain. Oil rigs are at their highest level in almost a year, boosted by the Middle East conflict keeping prices elevated.
Producers remain cautious about expanding capacity, said Andrejka Bernatova, CEO of Dynamix Corporation III, an energy-focused special purpose acquisition company. Oil services companies raise prices when oil prices rise, she noted. “You really have to see higher oil prices on a sustained basis before you deploy more capital,” Bernatova said.
In a counterpoint to the broader market, Public Service Enterprise Group (PSE&G) said it plans to lower residential natural gas heating bills by 5% starting in October, despite climbing gas prices. The utility said it buys much of its supply months or years in advance, reducing exposure to market volatility. The announcement comes as the war in Iran continues to drive up global gas and oil prices.
PSE&G said its long-term planning approach to procuring natural gas helps reduce the company’s exposure to market volatility. The company said it monitors energy markets and forecasts demand to secure natural gas ahead of peak heating seasons.