DTN Oil

WASHINGTON (DTN) -- Heading into the Memorial Day holiday weekend, oil futures nearest delivery traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange erased earlier losses to settle Friday's session with gains between 1% and 3.5% on reports suggesting Iran seized two oil tankers in the Strait of Hormuz -- a critical water passage for millions of oil barrels at a time when the global market is sliding further into a supply deficit amid disruption to Russian crude oil exports and limited capacity from OPEC+ nations to quickly ramp-up emergency crude production.

A combination of bullish market fundamentals and geopolitical factors propelled the international crude benchmark towards $120 barrel (bbl) on Friday -- reaching the highest price point since March 23. Brent outpaced gains for the West Texas Intermediate that settled the session at $115.07 bbl, up $0.98. Brent settled the session $2.03 higher at $119.43 bbl.

Media airwaves were hit with reports on Friday indicating Iran seized two Greek oil tankers in the Persian Gulf that were loaded with crude oil from Basra, Iraq. The action could be retaliation for Greek assistance in the U.S. seizure of crude oil from an Iranian-flagged tanker this week in the Mediterranean Sea. The Iranian tanker reportedly violated Washington's sanctions on trading crude oil originated from the Islamic Republic.

The incident might not affect the global supply-demand balances but further highlights the challenges in reaching a comprehensive nuclear agreement with Iran that could see sanctions relief free up millions of barrels of oil. Talks in Vienna stalled last month with top U.S. diplomats suggesting the prospects of reviving the 2015 nuclear deal are "tenuous at best."

On Wednesday, the United States said it was sanctioning an international oil smuggling and money laundering network that has facilitated the sale of oil for Iran's Islamic Revolutionary Guard Corps-Qods Force and the Iran-backed Hezbollah group.

Iran's seizure on Friday was just the latest in a string of hijackings to roil the Strait of Hormuz -- a narrow waterway of the Persian Gulf through which a fifth of all traded oil passes. The incidents began after former U.S. President Donald Trump unilaterally withdrew the United States from Iran's nuclear deal with world powers.

Against this backdrop, the European Union is set to announce a sixth sanction package against Russia for its illegal invasion of Ukraine that will likely include a ban on Russian oil imports. The measure, however, could spell out carveouts for oil imports through a Russian pipeline into the landlocked countries of Hungary and Czech Republic. The Hungarian government has remained a major opponent to banning Russian oil imports, comparing it to a "nuclear bomb" being dropped on the Hungarian economy. Media reports indicate Hungary is pressing for about 750 million euros to upgrade its refineries and expand a pipeline from Croatia to enable the switch.

Last month, EU proposed a phased-out approach to banning Russian oil imports, with several states including Hungary, Slovakia, and Czech Republic having been granted a longer period to transition away from Russian oil. Even without a formal ban, there is less Russian oil available to the market as buyers and trading houses avoid dealing with crude and fuel suppliers from the country. Based on Bloomberg calculations, Russia's current production is below 10 million barrels per day (bpd) at around 9.16 million bpd, and more than 1 million bpd below its quota under an OPEC+ production recovery agreement.

Next week, oil traders will switch their focus to OPEC+'s monthly policy meeting scheduled for June 2 that is set to stick to an oil production deal agreed to last year that would raise July output targets by a modest 432,000 bpd. Western nations have repeatedly asked OPEC+ to increase production more aggressively amid tightening global oil market. Rebuffing those calls, Saudi Aramco's Chief Executive Amin Nasser reiterated this week that "effective spare capacity" stands at just 2% or 2 million bpd. Spare capacity is the amount of untapped production that can be quickly turned on. "You need a resilient and strong spare capacity to make sure that you can absorb any supply shocks," Nasser said this week.

On the session, NYMEX RBOB June contract rose 13.84 cents or 3.5% to $4.0158 gallon, while front-month ULSD advanced 3.49 cents to $4.0029 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com