May was another exceptionally volatile month for global oil markets, although price action gradually shifted from outright panic to cautious optimism as markets began to price in the possibility of a negotiated settlement between the United States and Iran. Brent crude started the month above $109/bbl, having inherited a substantial geopolitical risk premium from April’s closure of the Strait of Hormuz, and spent much of the first half of May fluctuating between $100-115/bbl as military strikes, ceasefire violations and diplomatic manoeuvring dominated sentiment.
The month opened with the effective collapse of the fragile ceasefire that had been brokered in April. Iranian attacks on vessels in and around the Strait of Hormuz reignited fears of a prolonged disruption to one of the world’s most important oil transit routes. Although OPEC+ announced another modest production increase for June, markets largely ignored the additional barrels, recognising that supply additions elsewhere could not fully compensate for restrictions on Gulf exports. Brent briefly surged above $114/bbl during the first week of May as traders priced in the prospect of an extended blockade.
Throughout the middle of the month, diplomatic efforts intensified. Reports emerged of draft agreements being exchanged between Washington and Tehran, while President Trump’s visit to Beijing highlighted China’s growing role in attempts to broker a settlement. Each indication of progress triggered sharp downward corrections in crude prices, while every setback or military incident quickly reversed losses. As a result, Brent repeatedly traded within a wide $100-108/bbl range, reflecting the market’s uncertainty over whether a lasting peace agreement could be achieved.
Despite the focus on geopolitics, underlying market fundamentals continued to tighten. Distillate markets remained particularly stressed, with diesel inventories in both Europe and the United States falling to levels not seen in decades. Northwest European refined product stocks remained at their lowest levels since 2014, while European middle distillate inventories fell to their lowest level since 2008. US diesel inventories dropped to their lowest level in more than twenty years, supported by strong export demand and refiners prioritising jet fuel production due to stronger margins.
By the second half of the month, evidence of demand destruction began to emerge. High fuel costs reduced diesel consumption across parts of Europe, while Chinese refinery throughput fell to a four-year low as crude supplies from the Gulf region remained constrained. Airlines continued adjusting schedules and fuel sourcing strategies to manage elevated jet fuel costs, although concerns over outright shortages eased as imports from alternative regions increased.
The final week of May saw a significant reduction in risk premium. Reports suggested that Washington and Tehran were moving closer to a 60-day Memorandum of Understanding that could ultimately reopen the Strait of Hormuz and extend the ceasefire. While military strikes continued sporadically, traders increasingly focused on the prospect of diplomacy rather than escalation. Brent fell steadily through the week, ending the month near $93/bbl, its lowest level since the conflict escalated earlier in the year.
Currency markets were comparatively stable throughout May. Sterling remained supported by persistent inflation concerns and Bank of England commentary suggesting rates could remain elevated if energy-driven inflation persisted. However, UK political uncertainty following poor local election results for the Labour government limited gains against the US Dollar.
