Looking back at August's trading, WTI crude futures settled the month at $86.31 per barrel, marking a monthly decline of 0.56%. Meanwhile, Brent crude futures closed at $90.67 per barrel, slipping 0.41% month-over-month, and INE crude futures ended at 635.1 yuan per barrel, posting a substantial gain of 16.30%.
Geopolitical tensions remained the dominant force dictating oil price movements. The relationship between Washington and Tehran flipped from initial hopes of reaching an agreement at the start of August to renewed hostilities by mid-month, creating a complete reversal in market expectations. As the month concluded, the window for negotiations had effectively closed in the short term, with both sides gearing up for continued brinkmanship through September. Iran appears to be betting that President Trump will eventually soften his stance under pressure from the upcoming midterm elections, while the US believes it has found workable countermeasures against Tehran: the deployment of shadow fleet tankers to move crude discreetly, retaliatory strikes on Iranian oil vessels, and a tightening noose around Iranian export routes. Until a decisive edge emerges in this standoff, a meaningful accord looks unlikely, yet we still anticipate the conflict will reach a clearer point before the midterm vote.
Trade flows through both critical chokepoints are being redrawn as shadow tanker traffic thrives beneath the surface. Yemen's Houthi rebels, part of the so-called axis of resistance, kept up their harassment of Saudi-linked tankers throughout August, forcing a transformation in Red Sea trade dynamics. Vessels originally scheduled to load at Saudi Arabia's Yanbu terminal have instead been rerouted northward to Egypt's Sidi Kerir hub or through the Suez Canal, which preserves shipment volumes but significantly inflates ton-mile shipping expenses and raises the effective cost for Asian buyers. For the four-week stretch ending August 31, average flows through the Bab el-Mandeb and Strait of Hormuz registered 3.418 million barrels per day and 3.941 million barrels per day respectively, both showing marked declines compared to the previous month.
A fragile glimmer of peace has emerged between Russia and Ukraine, though its impact on crude markets remains muted. By the close of August, Kyiv and Moscow were still trading blows, with mutual strikes on refinery infrastructure exacerbating already tight refined product supplies, particularly diesel. Now, as September gets underway, the US President is exploring a possible push for negotiations between the warring parties, partly to burnish his credentials ahead of the midterm elections, especially given the impasse in the Middle East. An American special envoy has already visited Russia, and both nations have agreed to a three-day ceasefire. Still, the outcome remains highly uncertain, and for now, Ukraine-Russia dynamics are no longer the central price driver for crude.
Going forward, market participants should keep a close eye on four key factors: the transit status through both the Strait of Hormuz and Bab el-Mandeb, the trajectory of US-Iran geopolitical flashpoints, demand trends out of China, and the progress of Russia-Ukraine negotiations.
Geopolitical shocks repeatedly whipsawed prices across the month. WTI, Brent, and SC front-month contracts registered monthly moves of -0.56%, -0.41%, and +16.30%, with monthly trading ranges of 15.5%, 18.37%, and 25.18% respectively. The strengthening positive carry in the futures curve reflects constrained chokepoint shipping and high refinery utilization rates across the United States, Europe, and India, suggesting robust underlying demand. From a supply-demand perspective, the market continues to price persistent near-term tightness against longer-dated slackness. Geopolitical flare-ups in August added a further risk premium to near-dated contracts, and if tensions or shipping restrictions persist into September, the front-end spread could see additional upward pressure. The more pronounced rally in the Shanghai crude contract stems from two factors: sharply higher freight rates on the TD3C route and a mild pickup in Chinese demand. Since March, freight costs have climbed steeply, driven by extended voyage routes and renewed geopolitical turbulence. With the Red Sea under Houthi attack, numerous Saudi-linked tankers have rerouted through the Suez Canal and around the Cape of Good Hope to reach Asian markets, tightening tonnage supply and lifting Very Large Crude Carrier rates for Cape passages. Given that China's domestic crude benchmark incorporates freight components, SC has naturally outpaced international benchmarks. Additionally, spot premiums for grades like ESPO delivered to Shandong suggest improved buying appetite across Asia. Even though international prices sat at relatively low levels during the tariff waiver window, better refining margins encouraged Chinese processors to lift import volumes. Still, as geopolitical uncertainties pushed prices higher, Chinese procurement has softened again. According to data from Kpler, seaborne crude arrivals into China reached 7.189 million barrels per day in August, noticeably higher than the June trough, but sustaining this bounce will depend on international oil price levels and domestic refining profitability trends.
Since the onset of direct US-Iran hostilities, geopolitical risk has remained the dominant force behind the wide intraday oscillations in crude prices. But the current market environment differs meaningfully from the immediate post-outbreak days. When fighting first broke out, prices spiked on emotional impulses as traders grappled with the potential for attacks on regional energy infrastructure. No historical precedent saw an outright and total closure of the Strait of Hormuz, even during the Iran-Iraq war when the waterway was dangerous but never fully shut. In uncharted territory, markets tend to bet first and analyze afterward. That early phase also priced in the complete disappearance of 15 million barrels per day transiting the strait. Over time, however, President Trump's policy of tanker insurance verification alongside coordinated supply-relief efforts such as strategic reserve releases, higher US imports, shadow fleet shipments, and redirected flows from transit hubs gradually pulled prices lower. The current trading backdrop stands in stark contrast to those early war days. For one, the global supply buffer is evaporating: floating storage has been drawn down dramatically, American strategic reserves sit at historic lows, and worldwide crude inventories have fallen sharply. Nearly every cushioning mechanism has been exhausted. Beyond headline geopolitical headlines, the market is now wrestling with the question of how much invisible supply actually exists, particularly the volume moving via shadow tankers since fighting reignited in late August. Estimates vary wildly across the industry. Most institutions peg Hormuz crude flows at roughly 8 million barrels per day, yet visible flows as tracked by Kpler indicate only 4.201 million barrels per day moving through the strait in August. The gap is attributed to vessels turning off their Automatic Identification Systems and smaller ships conducting ship-to-ship transfers south of the strait in the Gulf of Oman. A late-August media report citing US officials said American naval forces successfully escorted 40 tankers carrying 18 million barrels of oil through the strait in a single day, the highest wartime escort volume on record. That amounts to fewer than 500,000 barrels per vessel on average, suggesting these were predominantly smaller tankers engaged in lightering operations. This implies that while the US Navy cannot guarantee safety across the entire strait, it can feasibly sheathe vessels along the Omani coast. That may explain why Trump’s remarks at month-end downplayed any urgency to strike a deal with Iran, as Washington seems capable of keeping partial traffic functioning. How the conflict evolves and how much shadow shipping capacity persists will now become key trading anchors. Beyond geopolitics, the fundamental supply picture has clearly deteriorated from the opening stages of the conflict, which continuously ratchets up the floor under short-term price estimates. The broad expectation is that international crude will find solid support at the bottom, with upside dependent on geopolitical developments. Should calm return in September with supply restored, the global market could still return to a surplus early next year. If not, expectations of looser supply will keep sliding further into the future, keeping near-term barrels tight.
Houthi attacks on Saudi-linked vessels in the Red Sea have shown no sign of abating. We laid out in last week's report how the trade arteries through both Hormuz and Bab el-Mandeb have been completely rewired, revealing the remarkable flexibility of global crude supply chains under systemic stress. Yet no matter how adaptive routing becomes, overall shipment volumes and ton-mile costs still take a serious hit. In terms of trade flow reconfiguration, some vessels originally heading through Bab el-Mandeb have opted to swing north via the Suez Canal and around the Cape, a rerouting that dramatically extends sailing distances, inflates freight rates, and raises total delivered costs. Since laden Very Large Crude Carriers cannot normally pass through the Suez Canal with full drafts, effective fleet capacity is also being squeezed. To beat the Suez draft restrictions, some VLCCs unload at Ein Sokhna on the Red Sea side, move crude through Egypt's SUMED pipeline at around 2.5 million barrels per day, then reload at Sidi Kerir on the Mediterranean side. No matter the pathway chosen, shipping costs and transit times have ballooned. Sidi Kerir port saw monthly loadings jump to 2.1438 million barrels per day in August, chiefly reflecting Saudi-linked VLCC diversions to bypass Suez's shallow draft, while Suez Canal exports ran at 2.42 million barrels per day. Because Yanbu flows increasingly involve shadow tankers sailing dark, direct statistics are unreliable. But by combining Sidi Kerir loadings with Suez outflows and subtracting Egypt's normal export rate, we can roughly estimate Saudi Yanbu's northbound diverted volumes at around 4 million barrels per day. The Red Sea episode is primarily a re-routing exercise rather than a true loss of supply. Beyond those Red Sea diversions, other major departure points are also witnessing notable changes. Four key ports — Saudi Arabia's Yanbu and Ras Tanura, the UAE's Fujairah, and Iran's Kharg Island — recorded August loadings of 1.428 million, 741,000, 1.619 million, and 132,300 barrels per day respectively. These hubs offer valuable insights into how much supply transit transshipment points can compensate for, whether intra-Gulf shipments can persist, and the effectiveness of American restrictions on Iranian crude. Both Yanbu and Kharg Island have suffered severely under geopolitical strain, with Kharg loadings plummeting to near negligible levels. The Iranian Revolutionary Guard has insisted that exports continue all the same, largely by channeling oil through Iraqi partners. Yanbu’s visible flows are also distorted downward because many operators have switched off their AIS transponders for security. Correcting for these delayed data revisions, the broader conclusion from August data is that global crude trade arteries remain in a state of reconfiguration. The persistent strain on potential supply combined with elevated ton-mile costs from Red Sea rerouting continues to weigh on market fundamentals. As long as a mismatch persists between crude and refined product availability, pushing product prices higher and keeping global refining margins elevated, no immediate demand collapse seems imminent, and oil prices will likely maintain a firm floor on short-term valuations.
A fresh ray of hope for peace between Russia and Ukraine emerged as August drew to a close, but the actual market implications remain modest. Both sides have escalated their attacks on each other's refining infrastructure, tightening global diesel supplies in the process. The potential for renewed negotiations in September, however, appears unlikely to significantly shake crude markets. Russian crude exports, whether seaborne or via pipeline, remain largely unaffected. Seaborne shipments persist above 5.5 million barrels per day, down only marginally from their earlier highs, with pipeline volumes likewise stable. Since the Russian invasion began more than four years ago, the pair have attempted ceasefire talks multiple times, leaving the market rather desensitized to such overtures. Still, the current push, aided by the American envoy, could add fresh momentum. For the White House, delivering a resolution in Eastern Europe would hand President Trump a welcome political victory at a moment when Middle East diplomacy has stalled, offering a tangible achievement for his midterm campaign.
Looking ahead, we continue to harbor doubts over near-term prospects for a US-Iran deal, and expect crude to remain locked in wide-ranging fluctuations. On a monthly horizon, however, a preliminary resolution seems plausible before November, given President Trump's incentives to seek peace ahead of the midterm vote. Whether motivated by electoral calculus or avoiding dragging an unresolved war into the midterms, Washington holds clear reasons to pursue an exit. But as both sides currently believe they still hold cards, meaningful obstacles persist. Should geopolitical tensions escalate further, we would advocate engagement via calendar spreads or option structures rather than outright directional positions, as single-direction trades require greater geopolitical clarity. Investors are strongly urged to manage positions prudently and trade with caution.
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