Explained: Why are crude oil prices surging despite US supply surplus?

Global crude oil prices remained high this week as geopolitical tensions in the Middle East continued to worry investors. Despite a surplus in US crude production, West Texas Intermediate (WTI) crude traded above Brent crude for the first time since 2009. Analysts say the move highlights uncertainty over the factors driving the recent surge in oil prices.

On Tuesday, Brent crude futures rose 0.4 per cent to USD 110.19 per barrel. US WTI crude climbed 0.8 per cent to USD 113.31 per barrel. In March alone, WTI crude gained over 51 per cent, reflecting concerns over supply disruptions and rising fuel prices in the United States.

US Crude Prices Rise on Domestic Sentiments

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Speaking on the market, energy expert Narendra Taneja said, “The increase in US crude prices is largely due to domestic sentiments and statements from the US administration. Following aggressive rhetoric from the American side, particularly from President Trump, and retaliatory responses from Iran, the market remains concerned.”

Taneja noted that while talks of a 40-day ceasefire are ongoing, investors remain cautious. “Negotiations have yielded limited progress. Iran has made clear that it will not accept unilateral demands, keeping oil traders cautious,” he added.

Strait of Hormuz Remains Key Concern

The tensions are focused on the Strait of Hormuz, a vital chokepoint for global oil shipments. Taneja said, “The real concern is not the war itself, but control over the Strait of Hormuz. Any disruption or imposition of fees for tanker passage directly impacts oil prices worldwide.”

He added that Iran has started charging around USD 2 million for the safe passage of tankers. “Other states may follow, creating additional cost pressures,” he said.

Market expert Kishore Narne of Motilal Oswal noted, “The situation at the Strait of Hormuz is unlikely to return to previous norms where tankers could pass free of cost. Even if hostilities reduce, passage fees will remain, which will continue to push crude prices higher.”

Supply and Investment Risks Push Prices Higher

Metal expert Chirag Seth explained that US oil prices are sensitive even with an ample domestic supply. “The rise in crude is a reflection of both physical supply concerns and investment risks. Any disruption in tanker movement or increase in transportation costs is immediately priced in,” he said.

Analysts point out that crude prices are rising despite high US production because global oil markets are interconnected. “Even though US production is high, any perceived risk of supply disruption, particularly through the Strait of Hormuz, immediately drives prices higher,” said Taneja.

Impact on US Fuel Prices and Inflation

Rising crude has affected the US domestic fuel market. Gasoline prices surged nearly 37 per cent in March, while diesel prices increased almost 50 per cent. Analysts say higher crude costs are feeding inflationary pressures and limiting expectations of near-term interest rate cuts.

Market expert Dinesh Somani said, “Gold remains range-bound until clarity emerges on the geopolitical front. Short-term volatility is likely, but any prolonged conflict would eventually boost precious metals. Rising crude contributes to inflationary pressures, which indirectly affects other commodity markets.”

Market Anxiety Over Iran-US Talks

The deadline set by President Trump for a deal with Iran has added to market anxiety. Talks were expected to yield results by Tuesday, 8 p.m. Eastern Time (Wednesday 6:30 a.m. IST). However, with limited progress and continued rhetoric, investors remained cautious.

Narne added, “Investors are taking a wait-and-watch approach. Until normal tanker movement resumes and there is clarity on geopolitical negotiations, crude prices are likely to remain high. The market is factoring in risk premiums for potential disruptions, which outweigh the effect of US surplus crude.”

Price Trends and Outlook

Taneja concluded, “The focus now is on stability in the Strait of Hormuz. Any announcements related to safe passage or a breakthrough in negotiations will have an immediate impact on oil markets. Investors and traders should closely monitor these developments.”

Brent crude has declined 6.24 per cent in the past week. Monthly gains stand at 19.72 per cent, with three-month and six-month rises at 85.07 per cent and 69.55 per cent, respectively.

Over the last year, Brent crude has been up 72.82 per cent and has gained 75.70 per cent over five years. The maximum increase in Brent crude over a long period has been 609.53 per cent.