ING: Oil bounces on Persian Gulf re-escalation

Oil prices spiked following Iranian attacks on three ships in the Strait of Hormuz on July 7, including an LNG carrier and an oil tanker. ICE Brent settled a little more than 3% higher yesterday, and in early trading this morning it's up another 2.8%, leaving it trading above $76/bbl, ING said in a note. 

The curve structure also strengthened, with the front end returning to backwardation after recently flipping into contango amid the ramp-up of Persian Gulf supply. In addition, the physical market may have begun to turn. Dated Brent vs front-line Brent futures appear to have bottomed, creeping higher in recent days.

The Iranian attacks saw the US respond in a firm manner, with renewed strikes. There are reports of explosions near the strait. In addition to military strikes, the US revoked a temporary licence that it had previously issued to allow for the sale of Iranian oil. While the revocation doesn’t fundamentally change oil market dynamics, it’s important from a sentiment perspective. It heightens the risk of a breakdown in the temporary deal between the US and Iran.

The API reported overnight that US crude oil inventories fell by 400k barrels over the last week. Stocks at the WTI delivery hub, Cushing, fell by just 100k barrels. Inventory draws on the refined product side were more significant, with gasoline and distillate stocks falling by 2.9m barrels and 1.8m barrels, respectively. Tight inventories should continue to provide support to product cracks.

Ukrainian drone strikes on Russian refineries have intensified, adding fresh support to middle‑distillate markets. The sustained damage is now dragging down diesel exports, further tightening the refined-product balance. This comes at a time when the market is still awaiting a normalisation in refined product flows from the Middle East. As a result, the ICE gasoil crack has strengthened, trading back above $50/bbl. The latest re-escalation in the Middle East will only provide further support.

European gas prices also leapt higher with the latest developments in the Persian Gulf. TTF is up more than 4% in early morning trading today, moving above EUR48/MWh. The European gas market continues to look tight as we move through the injection season. Storage is less than 51% full compared to a 5-year average of 66%. LNG imports in Europe have fallen as Asia has increasingly turned to the spot market amid supply disruptions in the Middle East. The latest re-escalation only adds to concerns about tightness as Europe moves closer to the heating season.

Metals – China ramps up gold buying

Gold edged lower in July 7 afternoon trading after an early advance as investors looked ahead to the release of the June Federal Open Market Committee minutes later this week for further clues on the Federal Reserve's policy path. The metal continues to trade largely in line with shifting US rate expectations. Last week's weaker-than-expected jobs data reduced expectations of additional tightening and helped gold stabilise back above the $4,000/oz level. Ongoing security concerns around the Strait of Hormuz also supported safe-haven demand.

Meanwhile, official-sector demand remains supportive. Data from the People's Bank of China showed it increased its gold reserves for a 20th consecutive month in June. This marks its largest monthly purchase since late 2023. The continued accumulation highlights China's ongoing efforts to diversify reserves and reinforces a broader trend of strong central bank buying. It should continue to provide an important source of support for gold prices despite recent volatility.

In base metals, aluminium extended gains for a second session, rebounding from a four-month low as lower prices attracted buying interest in China. The metal had come under pressure last week as Middle Eastern supply recovered faster than expected following the ceasefire, but the market is still expected to remain in deficit this year. Supporting the constructive outlook, China's aluminium spot inventories fell for a twelfth consecutive session to 1.09Mt, more than 25% below their April peak. Renewed attacks on vessels near the Strait of Hormuz added to shipping risk concerns.

Meanwhile, the latest COTR data showed speculative sentiment continued to soften. Net long positions in LME aluminium fell by 14,891 lots for a fourth consecutive week to 53,923 lots in the week ending 3 July, the lowest level since May 2019. The decline was driven largely by long liquidation as concerns over potential shipping disruptions through the Strait of Hormuz eased following the ceasefire. In copper, net longs fell by 1,815 lots for a fifth straight week to 46,921 lots, while zinc net longs increased by 2,959 lots to 31,181 lots after three consecutive weeks of declines.