Vessels at the Strait of Hormuz, as seen from Musandam, Oman, on Thursday.Stringer/Reuters
The resumption of heavy bombardment in the war between the United States and Iran has oil markets betting that a full return of Persian Gulf crude supply remains a distant hope with the conflict now in its fifth month.
Crude prices began surging on Monday as traders grappled with the latest rounds of strikes in the Middle East. Earlier this week, U.S. President Donald Trump announced that a shaky ceasefire first declared in mid-June was over.
The U.S. launched attacks on Iran on Wednesday after Iran struck three oil tankers travelling the Strait of Hormuz. Iran responded by firing missiles and drones at U.S. targets in Bahrain, Kuwait and Qatar that have since been met with further U.S. retaliation.
U.S., Iran trade escalating attacks across the Mideast, threatening fragile ceasefire
The renewed hostilities pushed Brent –the international benchmark for crude oil – from around US$72 a barrel Monday to as high as US$80 Wednesday before closing Thursday at about US$76. The price eased on the hopes that negotiations between the U.S. and Iran could resume in the coming days as reports emerged that Iran’s foreign minister spoke to other regional leaders and Pakistan’s army chief - a key mediator in the war.
The North American benchmark – West Texas Intermediate – opened Monday around US$69 before surging as high as US$76 on Wednesday. It closed Thursday around US$72.
The Strait of Hormuz – the narrow waterway through which about 20 per cent of the world’s oil supply flowed before the war started Feb. 28 – has been the economic focus of the conflict as fears of Iranian attacks on tankers kept hundreds of vessels and thousands of seafarers trapped in the Persian Gulf.
While a primary goal of the ceasefire was to stabilize the global supply of energy, data show transits through the strait remained well below prewar levels when more than 100 ships a day would cross.
So far, vessel traffic has continued through the critical waterway this week, mainly through Iranian routes. Twenty-five tankers passed through the strait in both directions Wednesday, down from 49 the day before, according to the maritime intelligence firm Kpler.
“The market is not expecting a full shut of the strait necessarily, but quite a bit of risk remains,” said Dylan White, director of North American crude markets at Wood Mackenzie, a global energy research and insights firm.
While escalated tensions have markets pricing in additional risk of longer-term supply disruptions, a few days of conflict won’t be enough to fundamentally change global supply and demand balances yet, Kevin Book, managing director at ClearView Energy Partners, a Washington-based research firm, said in an interview.
“What you’re seeing is a market response to what could happen. Where we go from here depends on the escalatory pathway that the [countries take].”
Any lengthy closing of the strait or disruption to Gulf oil production could push up prices further.
The energy-security crisis, along with strained trade relations with the U.S., has helped fuel more support for Canada to diversify its oil exports. Last week, the Alberta government submitted plans for a new multibillion-dollar pipeline to the West Coast.
In April, the Trans Mountain pipeline surged to full capacity for the first time since its expansion as Asia-Pacific refiners turned to Canadian oil to replace supply from Persian Gulf sources.
But markets are expecting the resumption in conflict to be short-lived, according to John Auers, managing director of refined fuels at Novi Labs, a Texas-based oil and gas analytics company.
“I don’t see us going back to $100 no matter what happens.” Mr. Auers said.
“It’s just a matter of time on whether we get back to more of a fully open or mostly open strait where we get prices down below $70 levels.”
Before the conflict began, oil was trading below US$65 a barrel as global markets were expecting an oversupply of the commodity over the next year. Just before the conflict escalated this week, fears of an oil glut rose again.
Barring the risk of additional supply disruptions, markets expect that Mideast production could recover and contribute to a glut driven by supply growth from other regions.
Over the next year and into 2028, markets expect a global oversupply to be a defining factor for oil prices.
“Ultimately, when the strait will be open – we’re actually going to have a lower crude price environment than what we were,” Mr. Auers said.