The ongoing standoff in the Strait of Hormuz continues to escalate, putting pressure on oil prices to undergo a repricing.
Brent crude briefly broke above $90 per barrel on Tuesday, a significant recovery from around $83 over the weekend, yet it remains below the highs of over $100 last month and the peak of over $110 in May. Analysts warn that if the blockade persists, the market will be forced to increase the probability of a long-term closure, potentially pushing oil prices to a range of $120 to $140 per barrel.
The outlook for US-Iran negotiations deteriorated further over the weekend. According to Chinese state media, US President Donald Trump posted on social media on Sunday, August 10, noting that Iran is demanding compensation for losses suffered during the past five months of military conflict. Trump stated, "I am likewise demanding compensation from Iran, and I have instructed my representatives to explicitly include this demand in all future negotiations." This rhetoric has cast further doubt on hopes for a swift deal to reopen the Strait of Hormuz, leading oil prices to climb again.
Oil Prices Diverge from Supply Reality as Market Awaits a 'Tipping Point'
Current oil prices do not yet fully reflect the tightening supply caused by the ongoing disruption in the Strait of Hormuz. The market's expectation that negotiations can alleviate the crisis is creating an increasingly large gap with reality.
According to CNBC, Jefferies economist Modupe Adegbembo stated on Monday that traders still believe a deal can ultimately be reached to restore the flow of more oil and goods through the strait. However, she warned that this optimism is "time-sensitive," and if the stalemate persists through the end of this week or into next, it is unlikely that oil prices will maintain their current moderate trajectory.
Kieran Tompkins, Senior Climate and Commodities Economist at Capital Economics, noted that oil prices remain relatively low, reflecting the market simultaneously pricing in two scenarios: a rapid resumption of energy transport or a prolonged closure of the Strait of Hormuz. If the standoff continues, the market will have to increase the implied probability of a long-term blockade, potentially causing front-month crude oil futures prices to rise rapidly.
Tompkins further warned that if the strait remains closed and OECD oil inventories continue to decline rapidly, the oil market could hit a "tipping point" early in the fourth quarter. This is the point where inventories can no longer absorb supply gaps, and demand can only be reduced through higher prices. Historically, this phase could correspond to oil prices of $120 to $140 per barrel.
Buffering Factors Weaken, Upside Risks for Oil Market Increase
Multiple buffering factors that previously supported lower oil prices are now weakening. These include alternative export routes bypassing the Strait of Hormuz, weak demand, and phased production increases.
At the same time, the market's sensitivity to negotiation progress is significantly higher than its focus on actual supply constraints. Any sign of de-escalation quickly leads traders to bet on a resumption of shipping, pushing oil prices down. However, as negotiations fail to produce tangible results, this pricing logic is facing challenges.
Amrita Sen, Founder and Director of Research at Energy Aspects, stated that the market cannot sustain the current low oil price levels indefinitely. She believes that the market's recent reaction to negotiation progress has been overly optimistic. The actual supply side still faces significant pressure, compounded by ongoing attacks on regional infrastructure, leaving the fundamentals of crude oil generally bullish.
If the standoff in the Strait of Hormuz remains unresolved, the core variable driving market pricing could shift from "when will the strait reopen" to "how high is the probability of a long-term closure." Once the latter becomes the dominant expectation, oil prices could face a rapid new round of repricing.
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