Reports of an Iranian attack on a "hostile target" in the Strait of Hormuz have fueled a rally in Brent crude oil futures, the global benchmark. Concurrently, Tehran is pushing for a preliminary management agreement with Oman that would bar ships from the United States and other hostile nations from this critical waterway.
Brent crude futures have climbed back above the key technical level of $83 per barrel, following a surge of nearly 4% in the previous session. The North American benchmark, West Texas Intermediate (WTI) crude, is trading near $78 per barrel. The semi-official Fars News Agency reported the attack occurred late Thursday night, following an explosion near Qeshm Island in the Strait of Hormuz. As shown in the chart above, oil prices are rising again after Iran targeted hostile shipping in the Strait, with Tehran proposing to ban US vessels, significantly narrowing this week's losses.
Where negotiations stand and risks escalate
By Friday morning, the Middle East situation presents a contradictory state of "negotiations still progressing, yet channel risks simultaneously escalating." The new navigation arrangement under discussion between Iran and Oman seeks to restrict the passage of US and Israeli vessels through the Strait of Hormuz, potentially imposing fines of up to 20% of the cargo value on violators. Oman is considering a transit fee of around 3%. The US insists on a return to free, unimpeded passage as existed before the conflict, leaving the core positions of both sides far apart.
Meanwhile, following an explosion near Qeshm Island, Iran claimed to have attacked a "hostile target" within the Strait. The Houthi group launched a large-scale missile and drone attack on Yemeni forces aligned with Saudi Arabia, extending threats to Saudi oil tankers, the Gulf of Aden, and Red Sea shipping lanes. Iran has also warned that if the US resumes large-scale attacks, Gulf nations' oil fields, power grids, water systems, and transport infrastructure could face retaliation. This indicates that geopolitical risks are expanding from a single strait blockade to a large-scale regional threat encompassing energy production, refining, and transport nodes.
Oil bulls regain pricing power as risk premiums rise
As optimism for a full reopening of the Strait of Hormuz and a resumption of Persian Gulf energy transport fades, crude oil has recovered some of its losses from earlier this week. Under the proposed Iran-Oman agreement, Tehran also plans to ban Israeli vessels from the Strait and require hostile nations to pay compensation before using the waterway. "An agreement to reopen the Strait of Hormuz remains distant, and investors are in a state of uncertainty," said Rob Haworth, Senior Investment Strategy Director at US Bancorp Asset Management. "For now, shipping volumes are still low, and the path to a lasting deal is unclear."
Although US President Donald Trump has again stated his belief that the war will end "soon" and that progress on the Strait issue is "going well," significant differences remain between the conflicting parties on the terms of an agreement. The US insists on free passage for vessels, restoring the pre-war status quo, while Iran is pushing for the establishment of a fee mechanism. The Middle East conflict appears to be widening. Iran-backed Houthis said they launched a "large-scale" attack on Yemeni forces allied with the Saudi government. Earlier this week, the group claimed an attack on a Saudi oil tanker in the Gulf of Aden and threatened shipping in the northern Red Sea.
Price movements
In terms of specific price action, Brent crude futures for October delivery rose 1.4% to $83.61 per barrel as of 8:15 AM Singapore time. West Texas Intermediate crude futures for September delivery gained 1.2% to trade at $78.24 per barrel.
Refining sector takes over pricing power
Even a full reopening of the Strait cannot immediately fill the gap in refined product markets. In the short term, international oil prices will maintain a typical pattern of "diplomatic news driving prices down, military escalation pushing them up," with directionality far weaker than volatility. Brent crude fell to $79.36 per barrel on August 4 due to ceasefire and shipping resumption expectations, only to rebound to $83.48 per barrel by August 7 amid disputes over Strait transit conditions and security incidents. WTI followed a similar path, moving from $75.77 to $78.84 over the same period. These figures demonstrate that the crude oil market is not forming a stable, one-way bull market but is instead continuously reassessing risk premiums based on actual Strait traffic volumes, insurance availability, and the probability of a US-Iran agreement.
As long as shipping through the Strait of Hormuz remains significantly below pre-war levels, there is strong geopolitical support for Brent's downside. If attacks escalate to include oil fields, ports, or key shipping lanes, prices could spike rapidly. Conversely, an unconditional free-transit agreement would likely cause crude's risk premium to evaporate faster than that of refined products. Even if crude prices fall due to negotiations, diesel and jet fuel prices are more likely to "decline slowly and rebound quickly," keeping refining margins sticky at elevated levels.
According to some veteran energy analysts, refined product prices, particularly diesel and jet fuel, will likely show greater resilience than crude oil in the coming weeks. The core reason is that reopening the Strait of Hormuz first addresses the issue of whether crude oil can be exported, but it cannot immediately restore lost refinery capacity, product inventories, or logistics networks. A sharp decline in Russian diesel exports, attacks on refineries, disrupted product shipments from the Middle East, and constrained Chinese exports, combined with prolonged high refinery utilization rates and deferred maintenance, create structural bottlenecks that are harder to resolve than crude supply.
In July, the US 3-2-1 crack spread hit a record $64.58 per barrel, European diesel crack spreads exceeded $60 per barrel, and European gasoline premiums over crude stood at around $41 per barrel. BP's global refining margin indicator has averaged approximately $42 per barrel in the third quarter so far, significantly higher than the $30 per barrel in the second quarter and the $12 per barrel a year ago. The current more reliable logic is not simply to go long on crude oil but to bet on the scarcity of refined products and the cash flow elasticity of high-quality refining assets. This highlights the resilience of product prices over crude and the greater visibility of refining profitability compared to oil price trends, though the risk of asset price reversal remains highly concentrated on the single trigger of a peace agreement.
US refiners, with their flexible feedstock sources and export capabilities, are often able to fill the global diesel and gasoline gap. Pure-play refiners like Phillips 66 and Valero Energy are typically more sensitive to crack spread profitability than integrated oil companies. Meanwhile, ExxonMobil, Chevron, and Saudi Aramco form a more balanced geopolitical hedge through "upstream oil prices plus downstream profits."
Comments