It was always going to happen. The two key questions about any possible price rebound after three weeks of uncompromising selling pressure were the timing and the triggers. We now have answers to both. The jump took place yesterday and was precipitated by the inevitable, which has been difficult to acknowledge: namely, that the extended 60-day truce is fragile and vulnerable. As traffic began to normalise through the Strait of Hormuz, a cargo vessel was struck by a projectile near Oman, raising concerns about the sustainability of the relative calm. To add to the tension, Iran, according to the Financial Times, ordered four tankers to turn around, apparently rejecting the evacuation route used by cargo ships and endorsed by the International Maritime Organisation.

Yet concerns about any potential unplanned supply disruption eased meaningfully overnight. Although the UN suspended its escort of ships through the Strait following yesterday's incident, traffic has reportedly continued. As Reuters pointed out, eight South Korean vessels transited the chokepoint, while Saudi Arabia's resumption of loading operations at Ras Tanura also contributed to the overnight sell-off. The predominant view, it appears, remains one of imminent oversupply—unless the market's focus shifts towards refined products, which were the bellwethers of yesterday's reversal. More-than-healthy refining margins could indicate genuine tightness and shortages in refined products, which, in turn, might imply that the road back to normality will be much longer than the recent sell-off led us to believe.

On the financial side, a flurry of upbeat US economic data failed to sustain optimism. Initial jobless claims fell by more than anticipated, and US first-quarter GDP growth was revised upwards. Inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, rose above 4% in May, with the core reading reaching 3.4%. Expectations were broadly met and, with oil prices now significantly below May levels, inflation is likely to moderate in June, easing fears of a Federal Reserve rate increase. However, as OpenAI is reportedly considering postponing its planned IPO, concerns about the technology sector re-emerged, sending the South Korean stock index 8% lower. Whether in oil or equities, turbulence is the only constant that can be taken for granted.

Oil Executives Believe WTI is Cheap

The impact of the Iranian conflict has been so severe that the Dallas Fed rightly felt it necessary to update its first-quarter energy survey in April to reflect the views of oil and gas firms operating in the Eleventh District, which encompasses Texas, southern New Mexico, and northern Louisiana. Anxiety was palpable. The key takeaway from the update was concern over extreme volatility and its adverse impact on capital spending. Fast-forward two months, and the mood reflected in the second-quarter survey was markedly more relaxed. The survey was conducted between June 9 and 17, amid US-Iran ceasefire talks, so the outcome of those negotiations may not be fully reflected in the report. In total, 127 energy firms participated, including 82 E&P companies and 45 oilfield service firms.

According to executives, oil and gas activity picked up across the US Southwest in the second quarter of the year. Companies involved in exploration and production reported a brighter outlook; however, service firms warned of the effects of rising input costs. The combined outlook index remained positive, but the sub-indexes showed a wide divergence: for E&P companies, it stood at 48.2, compared with -4.4 for service firms.

According to the findings, costs increased at a faster pace in the second quarter than in the preceding three months. No oilfield service firms reported a decrease in costs, and the input cost sub-index jumped from 34.9 to 64.4 quarter-on-quarter. Among E&P respondents, the cost index rose from 22.3 to 40.0. All cost indexes were above their series averages, the survey found.

Investment also increased. The capital expenditure index surged from 21.2 to 40.9 in the second quarter. It is nonetheless worth noting that the expected capital expenditure index stood at zero, suggesting that the current pace of growth may prove unsustainable. Supplier delivery times lengthened, implying continued pressure on supply chains, with 36% of companies reporting longer wait times for deliveries.

In light of the brighter outlook and increased capital expenditure, views on future oil prices make for intriguing reading. The majority (46%) of respondents expect the price of WTI to be between $80 and $90 by the end of 2026, while 36% see it between $70 and $80. Only 6% believe that the US crude benchmark will be below $70 by year-end. On average, respondents expect WTI to be $83 in six months, $78 in one year, $78 in two years, and $82 in five years. The survey averages are all higher than in the previous quarter. These estimates are considerably above the current WTI futures curve, but once again, the implications of the US-Iran ceasefire may not be fully reflected in the responses.

In the special questions section, participants were asked to estimate US production growth under different price scenarios ($100, $125, and $150 per barrel). The most frequently selected response for each scenario was "more than 250,000 bpd but less than 500,000 bpd." A majority (65%) believe that WTI would peak at $125 or less this year if the Iranian conflict were to continue through year-end. Most respondents anticipate the conflict ending in the third quarter, and more than 50% consider it implausible that Iran could permanently restrict crude oil exports from the Persian Gulf.

Finally, the anonymous comments proved to be as candid as ever. Below are some of the most interesting remarks from both E&P firms and oilfield service companies.

E&P firms:
• The market is too soft given today's circumstances. I put $82 per barrel for West Texas Intermediate, but I'll bet that's light.
• Increased cash flow means more drilling.
• Markets can price risk, but they can't price a tweet. The whiplash from diplomacy-by-social-media has become the single most unpredictable input in our planning. We don't need certainty about the future, just certainty that policy won't change between morning and afternoon.
• The White House seems to prefer commotion and chaos to delivering meaningful, reliable information on which serious business decisions can be based.

Oilfield service firms:
• A fairly consistent theme is volatility and sector-wide cost inflation, where commodity prices do not offset rising costs.
• Elevated oil prices are not directly translating into increased production or stronger demand for oilfield services. Unprecedented geopolitical instability is creating greater uncertainty.
• Artificial intelligence (AI) can do much, but it cannot drill a 30,000-foot well.

Overnight Pricing