- Oil markets remain torn between hopes for a U.S.-Iran deal and worsening physical supply constraints, with Hormuz traffic at two-month lows and inventories steadily declining.
- Refined products are facing the biggest squeeze, as diesel, gasoil and jet fuel supplies tighten amid Middle Eastern and Russian refinery disruptions, pushing refining margins to record highs.
- A market tipping point could arrive by late September or early Q4 if Hormuz flows remain restricted, potentially sending toward $120–140 per barrel as inventories run down.
For months now, traders and market analysts have had to weigh two opposing scenarios for oil prices—the ongoing war and severely disrupted oil flows at the Strait of Hormuz and hopes that a U.S.-Iran deal would free up millions of barrels of oil and refined products trapped in the Persian Gulf.
For five and a half months of negotiations, threats, Iranian attacks on tankers, U.S. blockades on Iran’s oil exports, and numerous pledges of “strong responses” from both sides, oil prices have spiked and crashed so many times that these can only be compared to the number of threats from U.S. President Donald Trump to “obliterate” Iran.
This week’s story is the apparent stalemate over the control of the Strait of Hormuz, which remains mostly closed, with traffic at two-month lows.
Sentiment Vs Supply
moves on sentiment and (a lack of) hope about an imminent reopening of the Strait. This has been the case since the war began on February 28.
However, global inventories are depleting, including those from the massive releases from the strategic stockpile, while China, which has kept oil futures prices in check with a decade-low import level in May and June, is now back to buying more crude.
If the stalemate over the U.S.-Iran talks and the Strait of Hormuz control persists for a few more weeks, the physical oil market could reach the much-feared tipping point, beyond which shortages would be felt, and prices will spike, analysts say.
The crude oil futures haven’t jumped to record highs amid the biggest-ever disruption in oil markets, thanks to the low Chinese imports in the second quarter, the global release of strategic stocks, and the big buffer of oil on water at the start of the Iran war. But refining margins have jumped to the highest on record in the Atlantic Basin, amid depleting inventories, supply bottlenecks, and peak summer demand. Related: EIA Sees Massive Uptick in US Crude Oil Inventories
Analysts have started to point to the tightening fuel markets and China’s tentative return to increased oil imports as fundamentals that could lead to oil futures price spikes within weeks, if tanker traffic at the Strait of Hormuz does not begin to pick up again soon.
What’s Next for Oil Prices?
Early on Wednesday, prices rose above $89 per barrel as Iran and the United States offered contrasting claims about who controls the Strait of Hormuz.
Earlier this week, Iran said that the Strait of Hormuz will remain closed unless the United States ends the war and meets Tehran’s conditions.
Later on Tuesday, U.S. President Donald Trump said that the United States had “total control over the Hormuz Strait.”
The prospect of more severe demand destruction due to the protracted crisis and high fuel prices sent oil prices lower early on Thursday.
It looks like the market is more focused on all the rhetoric coming from the U.S. and Iran than it is willing to accept that the tightening fuel markets could reach the “tipping point” at about end-September early-October if oil flows at the Strait of Hormuz remain severely constrained.
“The crude set-up is more bullish on a fundamental basis,” Amrita Sen, founder and director of research at consultancy Energy Aspects, has recently told CNBC.
According to Kieran Tompkins, senior climate and commodities economist at Capital Economics, “If the strait remains closed and oil inventories in OECD countries continue to be depleted quickly, the oil market could reach a tipping point around the start of Q4.”
“This would be consistent with much higher prices, possibly in the region of $120-140 per barrel based on historical form,” Tompkins told CNBC via email.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, reckons that refined products “remain significantly tighter than crude as Middle Eastern and Russian refinery disruptions drive crack spreads and refining margins to exceptional levels.”
The crude oil futures market is being driven by all the Hormuz headlines, but the real squeeze in the market is in the refined products, especially the middle distillates diesel, gasoil, and jet fuel, Hansen said in a Wednesday analysis.
The International Energy Agency (IEA) flagged the tight fuel markets and high refining margins in its monthly Oil Market Report out this week.
“Despite a monthly increase of 1.8 mb/d, global refinery crude throughputs in July remained nearly 5 mb/d below year-earlier levels, with capacity elsewhere in the system currently unable to offset product supply bottlenecks,” the IEA said.
Even as U.S. fuel exports rose by about 700,000 barrels per day (bpd) in July from a year earlier, global seaborne trade in petroleum products slumped by 3.8 million bpd, amid plunging diesel and jet fuel exports from Russia and the Middle East, the agency noted.
“Although the market is projected to return to surplus towards the end of this year, risks remain substantial and the urgency of reopening the Strait has increased, as previously available inventory buffers are rapidly depleting,” the IEA added.
Saxo Bank’s Hansen wrote that “Until the Strait actually reopens and production visibly recovers, volatility looks set to remain a defining feature – while distillates and the shape of the futures curve may continue to provide the clearest evidence of just how tight the underlying energy market has become.”