Oil markets are on edge again

The squeeze is suddenly on again. After renewed Iranian attacks on tankers and 13 nights of American strikes Hormuz traffic has dwindled. In Yemen, Iran-allied Houthi rebels have declared a blockade of Saudi Arabia’s Red Sea ports, in retaliation for the Saudis’ own blockade of ports they control and strikes on the airport in Sana’a, the capital. They claim to have fired drones and missiles at Saudi oil facilities (though the Saudis have not commented). On July 23rd Brent touched $102 a barrel. Though it fell to $92 by July 27th that is still around 30% higher than on July 1st. Unless traffic resumes soon, it could top the $139 intraday high of 2022, after Russia’s invasion of Ukraine, and rise towards $150 by September, warns Jorge León of Rystad Energy, a consultancy.

Similar predictions were made at the start of the Iran war and did not pan out in the subsequent four months. They might not pan out this time. By July 26th two days had passed without further American or Iranian strikes; Omani mediators have been in Tehran. But now energy markets are more precarious, for three reasons: the Hormuz problem has grown more intractable; new threats have emerged; and protective buffers have already worn thin.

Hormuz is at the heart of the ceasefire’s breakdown. June’s loosely worded deal recognised Iran’s right to help “define the future administration” of the strait. When American warships began escorting tankers along Oman’s coastline (see map), in a channel Iran does not control, Iran took that as a breach. Several tankers were attacked. Iran also targeted “shuttle tankers” linking Omani and Emirati ports with ships waiting outside the strait, which had let exports resume faster than expected. What traffic remains is taking a route Iran does control (see chart 1).

Hormuz flows have shrunk from more than 8m barrels per day (b/d) in early July to less than 2m in recent days. Oil is again piling up inside the Gulf, even as supply outside it grows scarce. Asian refiners that bought Gulf cargoes for later this summer fear severe delays, if delivery comes at all. Only 8m barrels offered by the Emirati national oil company in mid-July were awarded to refiners in South Korea, Taiwan and Japan, compared with 20m per tender in June. Iran seems unlikely to release its chokehold before America makes serious concessions.

The renewed hostilities have cost some seamen their lives. On July 15th India asked shipowners, managers and recruitment agencies to stop deploying Indian seafarers—the world’s second-most numerous national group, at one-eighth of the total—through Hormuz. Logistical problems are mounting. War-risk insurance premiums can now reach 12% of a ship’s value, up from roughly 0.25% before the war, says a trader. Gulf countries that had begun cranking up output are cutting it again, fearing a lack of storage. Analysts doubt exports will return to pre-war levels before early 2027.

Of the new threats, the more serious is the Houthis’ blockade. Since April Saudi Arabia has sent an extra 2.5m-3.5m b/d of crude—around half its daily exports in 2025—via a pipeline to Yanbu, a port on the Red Sea which used to handle just 700,000 b/d (see chart 2), and then on to Asia via the Bab al-Mandab strait (see map). Japan and South Korea have become especially dependent on these supplies.

Exactly how much the Houthis will block is unclear. They claim to have struck two Saudi ships sailing between Saudi ports, yet let two Chinese-owned tankers carrying Saudi crude cross Bab al-Mandab. Some shipowners aren’t waiting to find out: four tankers carrying Saudi barrels have turned back, says Matt Wright of Kpler, a ship-tracker, and Western-owned ships are planning to avoid the strait or are crossing it with their transponders off. Vortexa, another tracker, counted just ten transits of large tankers through Bab al-Mandab on July 23rd, against 17 two days before.

Tankers can go through the Suez Canal instead, but not conveniently. It is too shallow for fully laden very large carriers, so part of their load must be transferred to smaller “Suezmaxes” before transit, straining port capacity; some crude may also be pumped through Egypt’s Sumed pipeline, at great cost. Transit times to Asia will nearly double, to 50-odd days, leaving importers there to scramble for alternative supplies already thinned by the Hormuz closure.

The other threat to global oil supply lies outside the Middle East. Between July 17th and 20th, Ukrainian drones attacked four tankers loading at the Caspian Pipeline Consortium terminal on the Black Sea, which usually handles around 1.5m b/d of crude exports from Kazakhstan and Russia. Loadings have been suspended, and August tenders for cpc oil have gone unanswered. Kazakhstan can divert some exports via smaller pipelines, but that may still leave Mediterranean refineries short of 1m b/d, sharpening the global competition for barrels.

The market’s protective buffers—reductions in demand and drawdowns from stocks—cannot absorb much more. Chinese crude imports have dropped by more than 5m b/d since February. Demand there, and in many poorer countries, has been cut to the bone. America’s strategic reserve, from which over 100m barrels have been released since March, is at its emptiest since 1983, and commercial stocks are nearing their practical minimum.

Consequently, energy markets are already tight. The price of “dated” Brent—ie, for delivery in the next few weeks—is slightly higher than for delivery a month after. The Brent futures curve, which briefly sloped upwards at the turn of the month, has flipped again (see chart 3). The crunch is worse in refined products: petrol is approaching $155 a barrel in America, jet fuel $160 in Asia and diesel $175 in Europe (see chart 4). Other commodities are affected too. Gas prices in Europe are at their highest since January 2023 as the bloc competes for scarce supplies with Asia, says Natasha Fielding of Argus Media, a price-reporting agency. Qatar, which usually supplies a fifth of the world’s liquefied natural gas, is already warning it may not honour some commitments before mid-October.

If the conflict lasts only another month, Brent may remain capped below $100. If it drags on, countries other than America will have to dip much deeper into shrinking stocks, pushing prices higher still as thinning buffers make future shortages more likely. JPMorgan, one of the more conservative forecasters, warns that each extra month of disruption would add $7-8 to the price of a barrel. Add a higher risk premium, and—without further serious demand destruction—crude consistently above $120 a barrel becomes credible by the end of summer.

That would push American petrol prices above $4.50 a gallon at the pump, up from $4.10 today. In the previous round of escalations, Donald Trump wavered when petrol approached that threshold. That Brent isn’t already higher suggests traders still expect him to blink again. They had better be right.

Editor’s note: This story has been updated.