The U.S. benchmark crude oil price bounced back overnight as renewed strikes between the United States and Iran called into question the sustainability of the current ceasefire. Adding to the pressure, Israel's threat to strike Beirut, Lebanon—a redline Iran has held firm on throughout these negotiations—raises the risk of a re-escalation of the conflict.

Light Sweet Crude Oil Futures (/CL) were up more than 4% in early trading Monday to more than $91 per barrel.

Over the past two weeks, WTI had pulled back by 14% as the market priced in a reacceleration of traffic through the Strait of Hormuz, compounded by slowing import activity, particularly across Asian markets. China's seaborne oil imports fell 21.5% from April to May, dropping from 8.10 million barrels to 6.36 million barrels according to Kpler. Most of this decline can be attributed to logistics hurdles out of the Middle East, where Iranian flows to China have dropped dramatically, as well as to price sensitivity. Notably, China still holds the largest strategic petroleum reserve (SPR) of any country in the world, and many experts believe it has yet to draw on those reserves in any meaningful fashion.

Among the byproducts to watch, diesel continues to capture the attention of energy market observers. Distillate inventory levels are 11% below the five-year average for this time of year. Producing a sufficient volume of diesel domestically requires medium and heavy sour crude—precisely the grades most affected by disruption in the Strait of Hormuz. Given diesel's importance to the global economy, where it powers the movement of freight by both road and rail, a supply shortfall could push up prices for goods and, eventually, services, adding upward pressure on inflation.

Gasoline is another byproduct to keep on the radar. Total motor gasoline inventories fell by 2.6 million barrels in last week's EIA Weekly Petroleum Status Report, leaving current levels 6% below the five-year average. And while the U.S. continues to draw significant volumes from its strategic reserve, roughly half of each draw is being immediately exported to meet global demand.

Overall, oil markets have pulled back for a combination of reasons, but the global supply shortage has not gone away. With continued SPR draws around the world serving only as a short-term fix, the risk of considerable demand destruction grows more plausible in the back half of this year—absent some form of resolution to the logistics issues plaguing the Strait of Hormuz.

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