Oil traders are betting on a fast US-Iran peace deal even as hostilities in the Middle East and Red Sea deepen, sending Brent and WTI lower this week. The International Energy Agency says global crude output remains 9.4 million barrels per day below pre-war levels, and some analysts warn markets may be underestimating the risk of a future price spike.
Traders shrug off Hormuz and Red Sea escalation
Brent crude sank below $80 a barrel earlier this week. WTI also dropped below $75 after President Trump said peace talks between the United States and Iran had resumed. Iranian officials denied any talks were in progress, though Iran is negotiating a deal with Oman over control of the Strait of Hormuz, which traders apparently took as more bearish news for oil.
Meanwhile Yemen's Houthis are striking Saudi tankers in the Red Sea, forcing Saudi Arabia to reroute exports through the Suez Canal and a much smaller pipeline to Egypt's Mediterranean coast instead of the larger East-West line to the Red Sea port of Yanbu. Iran's parliament is also discussing a bill to bar U.S., Israeli and other "hostile" vessels from Hormuz. The strait used to carry about a fifth of global oil and gas trade before the U.S. and Israel struck Iran in late February.
Physical supply keeps tightening
Despite the price drop, physical crude oil markets remain tight. The IEA's July Oil Market Report put global production 9.4 million barrels a day below pre-war levels. That was despite a rebound of over 4 million barrels a day in June, tied to a ceasefire that did not last a month. The agency separately warned that nearly 3 million barrels a day of regional refining capacity has shut due to attacks and a lack of export outlets.
Gulf crude storage is also draining. Citing Kpler data, Reuters reported Gulf states exported 70 million barrels in the weeks after the June ceasefire. That leaves 80 million barrels still in storage, which could be released if the Strait of Hormuz reopens.
Analysts still lean toward normalization
Even so, most desks expect the war to wind down. ING analysts wrote that despite distrust between Washington and Tehran, they hold to a view that "flows will start to normalise through the third quarter", with Brent averaging $80 a barrel this quarter. That supply and demand calculus, though, may not fully account for a supply shock that analysts say typically needs months to show up in prices — five months after the first strikes, the market is closer to that point.
Iran's push to charge ships for passing Hormuz and to co-manage the strait with Oman also hints that flows will not simply return to how they were before the war, even once the fighting stops.
Source: Oilprice.com
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