Global crude prices have fallen back towards $80 a barrel on expectations that a U.S.-Iran dealwill reopen the Strait of Hormuz, echoing the market response before the largely failed mid-June ceasefire. But the global energy market is now far more precarious, making traders’ optimism even less justified. Brent crude oil has tumbled from its recent high of roughly $100 a barrel on July 23 to around $80 after U.S., Iranian and Gulf officials indicated they were closing in on a new arrangement that could restore at least partial transit through Hormuz. The critical waterway carried around a fifth of the world’s oil and liquefied natural gas before the war. The emerging deal is likely to centre on an agreement between Iran and Oman to establish designated safe shipping lanes through the strait, which separates the two countries. The optimism surrounding the June 17 deal proved largely unfounded after renewed fighting. The market’s hope today is arguably even more questionable. In the past two months, Iran’s hand has strengthened, global refining capacity has shrunk, inventories have been depleted and the number of potentially vulnerable chokepoints has risen.
The U.S. and Iran might agree to a similar deal, but for markets, it’s a much more dangerous bet.
IRAN IN CONTROL
Control of Hormuz has become the central issue in the conflict that started on February 28 – and Tehran appears to have gained ground over the past two months.
While the June 17 ceasefire left the future status of the strait deliberately vague, the new arrangement is likely to grant Tehran at least some influence over shipping. The U.S. and its regional allies have long rejected any form of Iranian control. But after more than five months of severe disruption to energy exports – crude oil exports via Hormuz in July were around a fifth of their pre-war level – some Gulf producers may be willing to tolerate a compromise that restores at least part of their lost oil and gas revenue. They are likely already putting pressure on U.S. President Donald Trump, who faces serious criticism at home over his handling of the conflict, only a few months before key midterm elections.
In short, in June, traders could reasonably assume the ceasefire would eventually lead to a full reopening of the strait. But this time, unfettered transit appears far from guaranteed.
NO FLOOD THIS TIME
The supply backdrop has also changed dramatically.
As the June 17 ceasefire approached, oil traders expected a flood of crude to exit the Gulf, as nearly 150 million barrels of oil had accumulated on hundreds of tankers trapped behind the strait.
That surge materialised, with around 70 million barrels of crude and refined products leaving the Gulf in the month following the June agreement, according to Kpler data. This deluge helped ease fears of shortages, providing relief to consumers, particularly in Asia, the region hardest hit by the energy squeeze.
Today, the picture is different.
Only around 80 million barrels of oil remain stored inside the Gulf, meaning any “flood” following a reopening will be considerably smaller.
The difference is visible in the structure of the Brent futures curve. Within days of the June agreement, the prompt contract slipped into a small discount to the next month, a structure known as contango that reflects expectations of near-term oversupply. Today, the market is signalling the opposite. Prompt Brent contracts for October delivery are trading at a hefty premium of $1.50 a barrel to the November contract. This indicates that immediate supply tightness is expected rather than a short-term glut. Oil trading has increasingly focused on prompt contracts in recent months as traders struggle to gauge the conflict’s evolution. Any expectation of rapid rebalancing today appears as lofty as it was in June. “The risk premium unwinding over the last few days still continues to show physical tightness in the Brent structure,” said Keshav Lohiya, CEO and founder of HiLo Analytics.
DIESEL ON FIRE
Inventories are also in a more vulnerable position today. The prolonged disruption at Hormuz has forced consumers to draw on fuel stockpiles during the peak summer demand season in the Northern Hemisphere. As a result, market buffers – which were already slim in June – have shrunk further. This is particularly true for diesel. One of the most significant developments in the last two months has been the sharp deterioration in global diesel balances. Middle East disruptions have continued to curtail exports, while Russia, one of the world’s largest diesel suppliers, shocked markets in July by banning exports after months of Ukrainian drone attacks severely damaged its refining facilities.
These dynamics sent diesel refining margins soaring to an all-time high of $75 a barrel on July 31. Although they have since retreated to around $63, they remain more than 50% above mid-June levels. This growing stress in the diesel market underscores a broader challenge for oil traders. Even if crude exports from the Gulf partially recover, refining systems remain under acute strain. A reopening of Hormuz may improve crude availability, but it will not quickly resolve shortages of fuels that power much of the world’s freight, manufacturing and agriculture.
THE RED SEA
Compounding these concerns is the emergence of another major energy chokepoint. In June, the market could focus entirely on Hormuz, but now the conflict has expanded to the Red Sea, where Yemen’s Iran-backed Houthis last month declared a blockade on Saudi exports.
The Red Sea emerged as a critical alternative export route after the outbreak of the war, particularly for Saudi Arabia. It was able to continue exporting more than 4 million barrels per day, around 60% of its pre-war flows, even as Hormuz was almost entirely shuttered. The Houthi blockade, coupled with recent attacks on Saudi infrastructure, has significantly disrupted those exports. Whether the Houthis agree to lift their blockade as part of a broader agreement with Iran remains unclear. Even if they do, the risk that they could reinstate it will hang over the region, constraining U.S. negotiators and complicating the outlook for Middle East producers.
Gulf countries – and much of the rest of the world – are understandably desperate for a lasting settlement in the Middle East. Most will welcome any deal that reduces the immediate risks facing energy markets.
But any interim agreement will leave the issues that sparked the war unresolved – while also leaving Tehran – an unpredictable, aggressive actor – even more emboldened.
Perhaps “this time is different,” but not necessarily in the way traders would like.
(The opinions expressed here are those of Ron Bousso, a columnist for Reuters.)
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(Ron Bousso; Editing by Marguerita Choy and Anna Szymanski)