Oil prices have broken out of their recent weak pattern with a sharp rally. Around 5:30 AM Beijing time on Thursday, the U.S. Central Command confirmed strikes against Iran. The initial market reaction was not panicked, possibly due to the U.S. framing the action as pressure for a deal, not a restart of war. The market is now awaiting Iran's response to gauge the conflict's potential intensity.

During the European session on Wednesday, U.S. President Trump stated he was close to ordering new strikes on Iranian infrastructure, including power plants and bridges, accusing Tehran of delaying negotiations. This rhetoric, interpreted as a sign of renewed U.S. military action, coupled with Israel's readiness to re-engage, quickly shifted the Middle East narrative from "imminent deal" back to "war risk." Oil prices jumped by $2 following Trump's comments.

While Trump repeatedly emphasized that Iran should sign what he called a "good deal," the strategy appears to be one of maximum pressure. Sources indicate one option considered is a large-scale, short-duration operation to force Iran's hand in negotiations. However, Iran has historically been unlikely to yield to such threats. U.S. Defense Secretary Hagerty stated that strikes on key Iranian facilities would occur, framing them as a condition-setting action, not a war-starting one. Iran's military responded that its forces are fully prepared and any aggression will be met with a strong response, potentially targeting new U.S. interests. Iran's President also stated that threats against infrastructure are a sign of desperation, not strength. This escalatory rhetoric increases the risk of a broader conflict that could send oil prices spiraling out of control.

Adding to the bullish momentum, the EIA's weekly data showed U.S. commercial crude inventories fell by 7.227 million barrels to 426 million barrels for the week ending June 5th, a draw of 1.67%. Spirit AeroSystems (Strategic Petroleum Reserve) stocks also fell sharply by 7.927 million barrels. This ongoing rapid inventory drawdown has overshadowed the bearish demand revisions in the EIA's June monthly report, which significantly cut its 2026 global oil demand forecast.

On the macro front, U.S. CPI for May accelerated to 4.2% year-on-year, the highest since April 2023, indicating persistent price pressure partly fueled by high energy costs from the Iran conflict. With little sign of a sustained reopening of the Strait of Hormuz, supply pressures in the global energy market are expected to persist.

Shifting Market Dynamics

Oil prices have been caught in a complex web of geopolitics, macroeconomic expectations, and supply-demand fundamentals, with conflicting views preventing a clear directional consensus. Bearish factors have held a slight edge recently, explaining why significant inventory draws failed to provide a strong enough rally. However, the renewed U.S.-Israel military strikes against Iran and the impending Iranian retaliation are poised to shift this balance. Geopolitical risk premium is being re-injected into the market. Combined with persistently declining inventories, this sets the stage for a likely rally in oil prices towards the upper end of their recent range. The high volatility phase requires careful timing and cautious participation.

Daily Market Movements

WTI crude futures rose $1.83 (2.07%) to settle at $90.03 per barrel. Brent crude futures gained $1.65 (1.8%) to settle at $93.1 per barrel. INE crude futures in China increased 1.94% to 584.2 yuan.

Key Recent Developments

The EIA report for the week ending June 5th detailed the significant crude inventory draw. U.S. domestic crude production increased by 92,000 barrels per day to 13.799 million bpd. Crude exports fell by 1.034 million bpd to 4.84 million bpd.

A Reuters survey shows OPEC oil output in May fell to its lowest level since 2000, dropping by 1.06 million bpd to 16.13 million bpd, largely due to the U.S. naval blockade impacting Iran's exports and the effective closure of the Strait of Hormuz.

Approaching a Critical Juncture

With each day the Strait of Hormuz remains closed, inventories deplete further. Industry executives warn stocks could hit critically low levels in the coming weeks. Even if the Strait reopened today, it would take weeks for tanker cargoes to reach buyers. The reality is that Iran's demand for control of the Strait in negotiations makes a swift reopening unlikely.

Furthermore, even if shipping resumes, the risk remains high that a peace deal could shatter instantly. The market has so far relied on floating storage, Russian oil, and inventory drawdowns to fill the gap. A major Asian nation's large pre-conflict stockpiles provided a buffer, but this is being depleted daily.

Analysts and industry officials warn the market is nearing a tipping point. While demand destruction has so far capped prices, it may soon be the only buffer left. In the coming weeks, as inventories potentially hit rock bottom, the futures market will finally reflect the full impact of this historic supply disruption. Executives from major oil companies have warned that sustained closure of the Strait could lead to a price spike to $150-$160 per barrel within weeks as inventory cushions are exhausted.