The ongoing standoff in the Strait of Hormuz is intensifying, putting oil prices under revaluation pressure. On Tuesday, Brent crude briefly surged past $90 per barrel, a notable recovery from around $83 last weekend, though still below the $100 mark hit last month and the peak of over $110 in May. Analysts caution that if the blockade persists, the market will be forced to increase its probability assessment for a long-term closure, potentially pushing prices higher to a range of $120 to $140 per barrel.
The outlook for U.S.-Iran negotiations darkened further over the weekend. According to reports from state broadcaster CCTV, former U.S. President Donald Trump posted on social media on August 10, local time, stating that he noticed Iran is demanding compensation for losses suffered during the past five months of military conflict. Trump added, "I also demand compensation from Iran. I have instructed my representatives to explicitly include this demand in all future negotiations." This statement has further dimmed expectations for a swift agreement to reopen the Strait of Hormuz, leading to another climb in oil prices.
Oil prices diverge from supply reality, market awaits a 'tipping point'
Current oil prices are not yet fully reflecting the tightening supply caused by the ongoing disruption at the Strait of Hormuz. Market expectations that negotiations can ease the crisis are increasingly at odds with reality. Modupe Adegbembo, an economist at Jefferies, noted on Monday that traders still believe some form of agreement can eventually be reached, which would restore the flow of more oil and cargo through the strait. However, she warned that this optimism is "time-sensitive" and that if the stalemate continues through the end of this week or into the next, it is unlikely that oil prices will maintain their current mild trajectory.
Kieran Tompkins, senior climate and commodities economist at Capital Economics, stated that oil prices remain relatively low, reflecting the market pricing in two scenarios simultaneously: a rapid resumption of energy transport, or a prolonged closure of the Strait of Hormuz. If the standoff continues, the market will have to raise the implied probability of a long-term closure, which could cause front-month crude futures prices to rise quickly. 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. At that stage, inventories would be unable to absorb the supply gap, and demand would only be curtailed through much higher prices. Historically, this phase could correspond to an oil price range 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 is significantly more sensitive to progress in negotiations than to actual supply constraints. Any sign of de-escalation prompts traders to quickly bet on a resumption of shipping, pushing prices down. However, as talks fail to yield tangible results, this pricing logic is facing challenges.
Amrita Sen, founder and director of research at Energy Aspects, stated that the market cannot sustain 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 is still under considerable pressure, and with continued attacks on infrastructure in the region, the overall fundamentals for crude oil remain bullish. If the standoff at the Strait of Hormuz cannot be broken soon, the core variable for market pricing may shift from "when will the strait resume operations" to "how high is the probability of a long-term closure." Once the latter becomes the dominant expectation, oil prices could face a new round of rapid revaluation.
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