Traffic through the Strait of Hormuz has fallen to two-month lows as the standoff between the U.S. and Iran drags on, and analysts warn that continued restrictions could push crude toward $120-140 a barrel by early Q4. Refined products, particularly diesel, gasoil and jet fuel, are already facing the tightest squeeze as Middle Eastern and Russian refinery disruptions send refining margins to record highs. Brent Crude traded above $89 a barrel this week as Washington and Tehran offered contrasting claims over who controls the waterway.
Hormuz traffic stays near two-month lows
Oil markets remain caught between hopes for a U.S.-Iran deal and worsening physical constraints. Strait of Hormuz traffic has fallen to two-month lows while the waterway remains mostly closed. The war that triggered the disruption began on February 28, and five and a half months of negotiations, threats and tanker attacks have since driven prices through repeated spikes and crashes.
Yet crude futures have not jumped to record highs despite the disruption. Analysts credit low Chinese imports during the second quarter, the global release of strategic stockpiles, and a buffer of oil already on the water when the war began. However, China is now returning to higher buying levels after a decade-low import pace in May and June, and global inventories, including strategic reserves, are steadily depleting.
Refined products face the tightest squeeze
Diesel, gasoil and jet fuel supplies are tightening as Middle Eastern and Russian refinery disruptions push refining margins to the highest on record in the Atlantic Basin. Ole Hansen, head of commodity strategy at Saxo Bank, said refined products remain significantly tighter than crude as those disruptions drive up crack spreads.
Meanwhile, the IEA's monthly Oil Market Report found that global refinery crude throughputs in July stayed nearly 5 million barrels per day below year-earlier levels, even after a monthly increase of 1.8 million barrels per day. U.S. fuel exports rose about 700,000 barrels per day in July from a year earlier, but global seaborne trade in petroleum products still slumped by 3.8 million barrels per day as diesel and jet fuel exports from Russia and the Middle East plunged.
Rhetoric swings prices both ways
Brent Crude rose above $89 a barrel early Wednesday after Iran said the Strait will stay closed unless the U.S. ends the war and meets Tehran's conditions, while President Trump said the U.S. has total control over the Hormuz Strait. Prices then fell early Thursday on the prospect of demand destruction from the protracted crisis and high fuel prices.
Kieran Tompkins, senior climate and commodities economist at Capital Economics, told CNBC that if the Strait stays closed and OECD inventories keep depleting quickly, the oil market could reach a tipping point around the start of Q4, consistent with prices possibly in the $120-140 per barrel range based on historical form. According to CNBC: "The crude set-up is more bullish on a fundamental basis.", said Amrita Sen, founder and director of research at Energy Aspects. The IEA added that the market is projected to return to surplus toward the end of the year, but risks remain substantial as inventory buffers deplete.
Source: Investing.com (Commodities Analysis & Opinion)
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