Geopolitical concerns continue to escalate, pushing crude oil prices past the $100 per barrel threshold for the first time since May.

As of the close on July 24, NYMEX light sweet crude for September delivery surged $5.36 to settle at $92.19 per barrel, a gain of 6.17%. Meanwhile, Brent crude for September delivery rose $6.62 to close at $100.69 per barrel, marking its first settlement above $100 since May and a 7.04% increase. Shanghai crude oil futures also rallied, with the main contract closing up 7.11% at 604 yuan per barrel.

Market Highlights and Key Data

Brent crude oil futures breached the $100 per barrel level for the first time in two months. This move follows an attack by Yemen's Houthi group on two Saudi oil tankers navigating the Red Sea, escalating the regional conflict in the Middle East and threatening further disruptions to oil supplies. The Houthi attacks have opened a new front in the regional conflict, coming as traffic through the Strait of Hormuz is already strained due to US-Iran tensions. Since the onset of the conflict, the Bab el-Mandeb strait in the Red Sea has become a vital lifeline for oil exports. Both the US and Iran have recently downplayed the possibility of peace negotiations, raising the potential for a prolonged state of hostility.

A senior US official stated that the US has set tariffs of 10% to 12.5% on several countries, while exempting products such as oil, natural gas, fertilizers, and food from these tariffs.

Japan has transformed into a net importer of petrochemical products due to a surge in naphtha prices. According to Nikkei, disruptions in crude-derived naphtha supply stemming from the Iran conflict have led Japan to significantly increase imports of basic petrochemical raw materials used in products like plastics, opting for more cost-effective purchases from China and South Korea. Trade data shows that Japan's ethylene imports surged 14-fold year-on-year between March and May. Imports of butadiene, a synthetic rubber raw material, more than doubled, while benzene imports jumped over 28-fold. Concurrently, exports of these products have declined, with ethylene exports falling to nearly zero in May. Japan's petrochemical trade balance has reversed, with imports exceeding exports. According to the Japan Petrochemical Industry Association, Japan's ethylene imports exceeded exports by 19,000 tons in April and 15,000 tons in May, marking the first monthly trade deficit for ethylene since comparable data became available in 2000.

Ukraine's military reported attacking a Russian oil tanker in the Black Sea and a pontoon bridge target in Donetsk. The General Staff of the Armed Forces of Ukraine stated that on the night of July 23, Ukrainian forces struck several important military and military-economic targets of the enemy. The attack targeted an oil tanker in the Black Sea waters, used for transporting Russian oil, petroleum products, and fuel to support the Russian armed forces. Additionally, a pontoon bridge near the Novoeconomicheskoye area in Donetsk was also hit.

The French government has called on the Houthi group to cease attacks on Saudi oil tankers, describing the actions as a major and irresponsible escalation. A French Foreign Ministry spokesperson told reporters that the Houthi attack on Saudi tankers was irresponsible and a serious escalation. The Houthis stated they had struck two Saudi oil tankers as part of a campaign to impose a naval blockade on Saudi Arabia, threatening to create a second bottleneck for global oil supplies while the Strait of Hormuz is nearly closed.

Kazakhstan's oil production has declined following the shutdown of its main export terminal due to a drone attack. The closure of the Black Sea terminal, a key export gateway for Kazakh crude, has led to a drop in the country's output. The decline has been particularly sharp at the Chevron-led Tengiz field, the country's largest. Production there has more than halved, falling from an average of 925,000 barrels per day (bpd) in July to roughly 406,000 bpd on Wednesday. Kazakhstan's total oil and gas condensate production on Wednesday dropped to 1.63 million bpd from a July average of 2.07 million bpd.

Investment Logic and Outlook

Geopolitical factors remain the primary driver behind the recent surge in oil prices, including the renewed closure of the Strait of Hormuz, the shutdown of the CPC terminal, and Houthi attacks on Red Sea tankers. However, the physical crude market has remained relatively restrained. While Middle Eastern crude physical differentials have rebounded significantly, differentials in Europe, West Africa, and Latin America have largely held steady without a major spike. This contrasts sharply with the market conditions seen in March-April. The physical market is currently not experiencing a shortage, nor has panic buying ensued, primarily due to persistently low Chinese import demand. Import needs from other countries are generally being met. Furthermore, the nearly 80 million barrels of cargo that were delayed when the strait previously reopened are acting as a buffer for the market. A significant divergence has emerged between paper and physical markets, suggesting the current rally is primarily sentiment-driven rather than based on fundamental supply-demand dynamics.

Strategy and Risks

The situation in the Middle East remains volatile, increasing short-term upside risks. However, given the rapid pace of developments, a wait-and-see approach is recommended.

Downside Risks: Liquidity crisis, macro black swan events.

Upside Risks: Escalation of the Middle East conflict, continued decline in the number of tankers transiting the strait.