Oil Prices Fall on Hopes of De-Escalation, but Diesel Supply Remains Tight

Oil prices moved lower this morning as the market reacted to President Donald Trump’s decision to call off planned strikes on Iran and renewed hopes that tensions surrounding the Strait of Hormuz could ease.

Prompt WTI futures were down approximately $5 per barrel after crude prices had already fallen nearly $5 per barrel over the previous week. Prices opened about $4.50 per barrel lower on Sunday after President Trump said a deal to reopen the Strait of Hormuz may be close and that new talks with Iran would begin Monday.

However, Iranian Foreign Ministry spokesman Esmail Baghaei said that no negotiations with the United States were underway and that no meetings were scheduled. According to Baghaei, the only active discussions involved Iran and Oman and focused on managing the Strait of Hormuz.

That contradiction leaves the market with significant uncertainty. Prices are responding to the reduced likelihood of an immediate U.S. attack, but the diplomatic path remains unclear, and the dispute over control and access through the strait has not been resolved.

The latest security incident also showed that risks remain. The United Kingdom Maritime Trade Operations agency reported that a vessel’s master heard an explosion in the water near the ship overnight.

Despite those risks, other developments offered some relief to the supply outlook. At least five very large crude carriers were berthed at oil-loading terminals in Yanbu on Saturday, marking the busiest day there since the Houthis imposed a blockade on Saudi ports.

The Caspian Pipeline Consortium is also continuing operations, and officials said a complete shutdown is no longer being considered. In addition, major OPEC+ producers approved a modest increase in production quotas, raising their collective target by 188,000 barrels per day over the next month.

Broader financial markets also reflected improved risk sentiment. S&P 500 futures were up 0.6% Monday morning, while the U.S. dollar traded lower following reports that the United States and Iran could continue diplomatic efforts.

Still, the picture is very different in diesel markets.

European diesel wholesale margins have reached an all-time high of $65 per barrel as supply disruptions, falling exports from the Middle East and Russia, and low inventories tighten the market. OECD commercial diesel inventories are estimated to be 11% below seasonal norms, a level that can produce increasingly large price reactions when additional disruptions occur.

Global refinery runs are estimated to be down 7 million barrels per day compared with last year, led by outages and disruptions across the Middle East, Asia Pacific and Russia. The continuing outage at Saudi Arabia’s Jazan refinery is adding to the pressure, while Russia has extended its diesel and gasoline export ban through the end of January 2027.

Ukraine also struck a Russian refinery overnight during a series of drone attacks, causing a fire at the facility. Refinery outages in Russia are expected to last longer than disruptions in the Middle East, particularly as Ukrainian drone production appears to be increasing.

Drilling activity also increased during the latest reporting week. The U.S. crude oil rig count rose by one to 451 rigs for the week ending July 31. The total was six rigs higher than a month earlier and 41 rigs higher than a year earlier. Canada’s crude oil rig count increased by 12 to 150 rigs. Canadian activity was up by 20 rigs month over month and 26 rigs year over year.

Market participants also became more bullish on crude before the latest price decline. Managed money net length increased by 45,400 contracts through last Tuesday. WTI net length rose by 28,960 contracts, while Brent net length increased by 16,450 contracts, supported by additional long positions and a reduction in short positions.