Oil prices continue to exhibit high volatility amid shifting geopolitical developments in the Middle East, even as global crude inventories tighten at a concerning pace.
Despite periodic hopes of a diplomatic breakthrough, the market remains vulnerable to supply disruptions, with commercial stockpiles providing a shrinking buffer.
At the time of writing, the price of West Texas Intermediate crude oil was at $95.03 per barrel, down 1%, while Brent crude on the Intercontinental Exchange was 1.1% lower at $96.73 a barrel.
US crude stocks see sharp draws
According to the latest EIA data, US commercial crude oil inventories fell by 7.97 million barrels last week. This marks a significant draw, bringing the total decline over the past month and a half to around 32 million barrels.
When including releases from the Strategic Petroleum Reserve, the broader inventory picture shows an even steeper decline of nearly 16 million barrels in a single week.
While some seasonal inventory decline is normal as refiners increase runs ahead of peak summer demand, the current pace is faster than usual.
Refined product stocks, particularly gasoline and distillates, saw modest builds, largely due to softer implied domestic demand.
ING highlights growing vulnerability
Warren Patterson, Head of Commodities Strategy at ING Economics, emphasised the tightening physical market.
Inventories have provided a cushion for the oil market. However, even if we see an imminent restart of oil flows through the Strait of Hormuz, the recovery will be slow and gradual.
Patterson noted that this slow recovery path suggests inventories are likely to continue tightening into the third quarter.
“This suggests inventories are likely to continue to tighten into the third quarter, leaving upside risk to prices,” he added.
Comments from Kuwait Petroleum further support this view, indicating it could take 6-8 weeks to return Kuwaiti output to just 70% of normal levels once the strait reopens, followed by another month to reach full capacity.
Geopolitical swings dominate sentiment
Oil prices have reacted sharply to every headline from the region. A recent Israel-Lebanon ceasefire agreement helped ease some immediate pressure, leading to modest price pullbacks.
However, renewed hostilities, Iranian missile activity, and mixed signals on US-Iran negotiations continue to create uncertainty.
President Trump has maintained that talks are progressing, but Iranian officials have pushed back, linking any broader deal to developments in Lebanon.
This back-and-forth has kept traders on edge, with Brent and WTI swinging between gains and losses on a daily basis.
Summer demand adds to pressure
The timing of these supply risks is particularly problematic as the Northern Hemisphere enters the high-demand summer driving and travel season.
The International Energy Agency has already warned that global oil inventories could reach critical levels if current drawdown rates persist.
Analysts believe the combination of structurally lower inventories and seasonal demand strength leaves the market with limited room to absorb further negative surprises. Any delay in the reopening of the Strait of Hormuz could quickly translate into stronger price spikes.
Medium-term outlook
While a successful diplomatic resolution could eventually bring relief, the physical market is expected to remain tight in the near term.
Patterson and other analysts caution that even positive developments on the diplomatic front will not immediately restore full supply flows due to infrastructure and ramp-up challenges.
For now, the oil market appears caught between hopes of de-escalation and the hard reality of depleting buffers.
With US inventories declining rapidly and global stocks under pressure, any sustained disruption could push prices significantly higher in the coming months.
The coming weeks will be critical as traders monitor both on-the-ground developments in the Middle East and fresh inventory data from the EIA.
Until clearer signs of supply normalisation emerge, the oil market is likely to remain highly reactive with a bias toward upside risks.
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