Week in Review – Oil Prices Swing Between War Escalation and Diplomacy

Oil markets are ending the week caught between war and diplomacy. Overnight, crude prices surged after the U.S. struck Iranian military assets tied to attacks on American warships near the Strait of Hormuz, reigniting fears of a broader disruption across one of the world's most important oil corridors. By Friday morning, much of those gains had faded as market shifted focus back to the possibility of a negotiated settlement between the U.S. and Iran. The reversal once again showed how sensitive energy markets remain to every headline from the Gulf, with oil prices swinging rapidly between fears of supply losses and hopes that exports could eventually return to normal.

Even after this week's renewed fighting, prompt WTI futures remain on track to finish down more than $7 per barrel week-over-week as hopes for a negotiated settlement continue to pressure prices lower. The expectation is that a deal between the U.S. and Iran could eventually allow part of the massive volume of crude currently trapped in the Gulf to return to global markets. Still, physical oil markets remain extremely tight. Estimates show oil exports moving through the Strait of Hormuz are running at just 4% of normal levels on a four-day moving average basis, creating one of the largest disruptions to global oil flows in recent years. At the same time, the U.S. military said more than 70 tankers are currently being prevented from entering or leaving Iranian ports, effectively locking up over 166 million barrels of crude and petroleum products.

Beyond the military situation, the market is also watching signs that high prices may already be starting to impact global demand and supply flows. Goldman Sachs Research noted that stronger crude exports outside the Gulf region and weakening Chinese demand are partially offsetting the supply shock from the Strait of Hormuz disruption. Global visible inventory draws have slowed from roughly 4.3 million barrels per day in March to closer to 2-3 million barrels per day since April.

Refined products continue to send mixed signals as well. While crude prices have pulled back from wartime highs above $120 per barrel, gasoline and diesel markets remain highly sensitive to export disruptions and inventory shortages ahead of peak summer demand. The timing is particularly important, as the market is now approaching the highest seasonal fuel consumption period of the year.

Broader financial markets are also reflecting growing expectations that diplomacy could eventually calm the energy shock. U.S. equity futures traded higher Friday while the dollar weakened as investors awaited Iran's formal response to the U.S. proposal. Meanwhile, the market is digesting several major economic developments that could influence energy demand in the months ahead. Goldman Sachs estimates U.S. nonfarm payrolls rose by 75,000 jobs in April, slightly above consensus expectations, while unemployment likely held near 4.3%. The market is also monitoring a new ruling from the U.S. Court of International Trade striking down replacement tariffs imposed earlier this year, although analysts expect the administration to appeal quickly and potentially keep the tariffs in place during a longer legal review.

For now, the energy industry remains trapped between two competing narratives. The first is the ongoing reality of disrupted Gulf exports, military conflict, blocked shipping routes, and tightening inventories. The second is the growing belief that negotiations between the U.S. and Iran could eventually reopen the Strait of Hormuz, allowing millions of barrels per day to return to global markets. Until there's a clearer answer on the direction of the conflict, volatility is likely to remain extremely elevated.

Prices in Review

Crude prices opened at $99.73 on Monday and climbed to $104.93 on Tuesday, the highest level of the week. Prices then eased to $102.70 on Wednesday before dropping sharply to $96.30 on Thursday. On Friday, crude recovered slightly to $98.25, down $1.48 per barrel during the week, or 1.5%.

Diesel prices fluctuated throughout the week, with gains early in the period followed by a sharp decline and partial recovery. Prices opened at $3.9215 on Monday and climbed to $4.0621 on Tuesday, then edged higher to $4.0805 on Wednesday. Prices reversed on Thursday, falling to $3.7651, before rebounding to $3.9210 on Friday. From Monday to Friday, diesel prices were essentially flat, decreasing by just $0.0005 per gallon.

Gasoline prices moved higher early in the week before declining and partially recovering by Friday. Prices opened at $3.5690 on Monday and rose to $3.7138 on Tuesday. Prices then eased to $3.6430 on Wednesday before falling to $3.4434 on Thursday. On Friday, gasoline rebounded to $3.5270. From Monday to Friday, gasoline prices decreased by $0.0420 per gallon, representing an overall 1.2% decline during the week.