Summer Driving Season Threatens to Amplify Oil's Geopolitical Premium
Summer Driving Season Threatens to Amplify Oil's Geopolitical Premium
- Crude oil futures jumped 5% Thursday as war risks amplified geopolitical premium.
- Oil remains above $90 per barrel despite a big early week drop and IEA’s 400 million barrel strategic reserve release.
- Summer driving season could add an additional tailwind as seasonal price drivers strengthen.
Crude oil prices continue to trade on war headlines
Crude oil futures (/CLK6) rose by about 5% in early Thursday trading after Iran stated that it was not interested in direct talks with the United States. President Trump also warned Iran to “ger serious” before it’s “too late.”
Prices dropped over 10% on Monday after President Trump softened his threats to attack Iranian energy infrastructure and said that he was talking with Iran to end the war, although he failed to give specifics on who he was speaking with.
Despite today’s upside in prices, oil remains about 3% lower on the week. The conflict is now going on day 27. The Organisation for Economic Cooperation and Development (OECD) said that global inflation is now projected to be 1.2% higher in 2026 versus previous estimates to put inflation this year at 4.0% before dropping to 2.7% in 2027.
With prices hovering above $90 per barrel, the strain on global markets remains at the forefront as traders focus on headline-driven volatility.
Crude oil and the products made from it, gasoline, distillates and jet fuel, have been sharply higher since the U.S. launched its first strikes against Iran on February 28.
The fallout from the explosion in prices continues to cascade throughout global financial markets. Equities and bonds are down, inflation expectations are up, and overall volatility has expanded.
Global efforts to tackle high energy prices have done little to temper the market’s reaction. The International Energy Agency (IEA) authorized the release of 400 million barrels, and discussions to release more are taking place.
While additional barrels from inventory can help to limit the economic pain imposed on the global economy, the fate of energy prices ultimately depends on the flow of oil.
The U.S. is amassing ground forces in the Middle East, a potential pretext for a ground invasion of Kharg Island and the immediate coastlines along the Strait of Hormuz. Short of a deal with Iran, the use of ground forces is perhaps the only option to secure the flow of energy. The oil must flow, and the United States is under pressure to make that happen.
Meanwhile, political pressure on the U.S. administration has grown, and polling shows the war becoming more unpopular than it was at the start.
Seasonality could add another tailwind to oil prices
The timing is also becoming problematic. Crude oil seasonality is strengthening, as refiners ramp up production of gasoline and other fuels ahead of the summer driving season.
U.S. refiners won’t have any issue with turning oil into fuels, as crack spreads—the premium of fuel prices versus crude oil prices—have strengthened.
Refiners in the U.S. like Valero Energy Corp (VLO) have already benefited from the expansion in crack spreads, with its stock price rising over 20% in the past 30 days.
However, this won’t protect consumers from higher prices. Keeping oil prices high is one of Iran’s strongest cards in this war. It will punish the global economy and exert pressure on its enemies, while at the same time filling its war coffers.
The high fuel prices will undoubtedly inflict some economic pain. The seasonality of the energy market won’t offer much relief. Crude oil prices will continue to be dictated by war headlines.
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