Crude climbs to weekly high as Houthi attacks overshadow Hormuz deal hopes

The session demonstrated the delicate balance of crude. At its peak, Houthi strikes added roughly $5, while reports of a potential Hormuz deal erased nearly half that gain within a few hours. The targeting of Yanbu is more significant than the number of strikes suggests, because it provides Saudi Arabia with an alternative route around Hormuz; attacks there threaten the primary alternative for Gulf supply. Following a 13% decline in WTI, short positioning creates potential for sharp upward moves on any escalation. A credible phased agreement remains the largest downside risk. Record diesel prices and the possibility of US restrictions on diesel exports keep refining margins high, even when crude prices decline.

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Houthi missiles targeting Saudi Arabia's Red Sea export route brought back the risk premium in crude. Then, talk of a phased US-Iran deal on Hormuz illustrated how fast diplomacy can remove it.

Summary:

• Brent crude settled near $106.50, up about 3.5%, the highest closing level since mid-September. WTI ended the session near $94.50, ending six consecutive days of losses that totaled roughly 13%.
• Both benchmarks rose about 5% at their daily peaks before retreating.
• Saudi Arabia intercepted six ballistic missiles fired by Houthi forces at Taif and Yanbu. After settlement, the Houthis claimed they also struck Aramco facilities in Yanbu and a target in Riyadh.
• US and Iranian negotiators are discussing a phased agreement under which Iran would reopen the Strait of Hormuz and the US would end its blockade. Neither side is willing to give up its leverage.
• New US secondary sanctions prompted Gulf countries to ban Iranian airlines, with Tehran threatening reprisals.
• Washington is considering restrictions on diesel exports as prices remain near all-time highs.

Oil prices closed Thursday about 3% higher at a one-week high, as a Houthi missile assault on Saudi Arabia rekindled supply concerns, according to Reuters. The session was marked by volatility, and crude retreated from its highs on reports that Washington and Tehran were exploring a reopening of the Strait of Hormuz. Brent ended the day around $106.50 per barrel, gaining roughly $3.50, the highest close since September 15. WTI settled near $94.50, adding almost $2.50, breaking a six-day losing streak that had seen it fall approximately 13%. At the day's peaks, both benchmarks advanced about 5%, with WTI briefly hitting near $97.

Saudi Arabia reported intercepting six ballistic missiles launched by the Iran-backed Houthis targeting the Taif region and the Red Sea export hub of Yanbu. After the market closed, the Houthis claimed they also struck Saudi Aramco facilities in Yanbu and a sensitive location in Riyadh, which contributed to the price gains. The group has vowed to meet siege with siege and escalation with escalation. Earlier, a senior adviser to Iran's Supreme Leader warned that the conflict might extend to the Indian Ocean and beyond. He noted the interconnection between the Gulf, the Red Sea, the Strait of Hormuz, and the Bab al-Mandab strait.

The timing is significant because Saudi Arabia has been increasing crude volumes via its East-West Pipeline to Yanbu, though tanker loadings there have not yet resumed. Aramco's CEO has stated that the company is exploring a fourth and fifth export route and can restore disrupted operations within days.

Pressure on Iran is also intensifying. New US secondary sanctions are aimed at third-country companies that do business with Iranian entities. This prompted the UAE, Oman, and other neighboring states to ban Iranian airlines, and Tehran has threatened to render the airports of complying nations unusable.

The discussions explain why the gains were pared. Negotiators in New York are exploring a phased agreement where Iran reopens the Strait of Hormuz and the US ends its blockade, potentially with Iran regaining access to frozen assets. However, both sides are hesitant to surrender their leverage. One senior Iranian official described the odds of a deal as extremely low, pointing to excessive US demands. A senior European official characterized Iran's own requests as a very long list. Iran's president added a twist at the United Nations, stating that Tehran hopes the US returns to a memorandum of understanding before the November midterm elections.

Diesel remains the main stress point in refined products. Prices reached record highs in recent weeks, as Russia's export ban and attacks on Middle East energy infrastructure constricted supply. US Energy Secretary Chris Wright has consulted major refiners about voluntarily limiting diesel exports. This follows a report that Washington was preparing a 90-day ban, a claim Wright has denied. The European Union has cautioned that a ban could damage both sides, and analysts contend it would do little to reduce prices while tightening global supply. Heating oil briefly declined on the day as the Hormuz reports emerged.

As crude prices swing between missile-driven headlines and talk-driven headlines, both the risk premium and the possibility of a deal are capable of shifting prices by several dollars in a single session.