Oil markets experienced a dramatic breakout on Thursday, with Brent crude reclaiming the $100 per barrel mark for the first time in two months. Prices accelerated sharply alongside a surge in backwardation, reflecting highly elevated market sentiment. The primary driver for this week's rapid ascent was the continued escalation of geopolitical risks following the failed US-Iran negotiations on Monday, solidifying a consensus view of tightening supply and creating an overwhelmingly bullish catalyst.
The Houthi movement in Yemen has begun attacking oil tankers in the Red Sea. Meanwhile, in the Strait of Hormuz, a tanker struck a mine, exploded, and caught fire, causing multiple vessels to turn back. The Revolutionary Guard declared the Strait was under its control and "completely blocked." More critically, there are no signs of de-escalation in geopolitical risks, with the US and Iran maintaining a strongly confrontational posture. While President Trump has publicly attempted to calm domestic concerns, calling the conflict with Iran a "small skirmish," he has simultaneously threatened Iran, warning it would be held responsible if Houthi attacks on Saudi vessels continue. Although some tankers are still risking passage through the Strait of Hormuz, the risk of supply disruptions from the Middle East has spiked this week, clearly instilling panic in the market. With oil prices breaking above $100, Trump may soon need to step in again to cool the market.
In just two weeks, oil prices have rebounded over $30, completely erasing the losses incurred after the US-Iran memorandum of understanding. The panic driving the current price action is set against a backdrop where supply buffers in the oil market have been significantly squeezed after months of inventory drawdowns earlier this year. The current blockade on Middle Eastern oil exports is more severe, swiftly shifting market concerns from a supply surplus in late June to a supply outage. This ongoing military friction between the US and Iran continuously adds a higher geopolitical risk premium to crude oil prices. Many investors who had begun trading on the logic of a supply surplus just weeks ago are finding it extremely difficult to adjust their views in such a short timeframe. However, the pressure from forced liquidations as prices surge will provide further upward momentum. The market will likely maintain its strength until tensions ease. With oil prices quickly returning to the $100 threshold, high volatility has also returned. While prices continue to push higher, risk management is paramount at these elevated levels.
Daily Data
WTI crude oil futures settled up $5.36, or 6.17%, at $92.19 per barrel. Brent crude oil futures settled up $6.62, or 7.04%, at $100.69 per barrel. INE crude oil futures settled up 7.11% at 604 yuan.
The US Dollar Index rose 0.33% to 101.45. The Hong Kong Stock Exchange USD/CNY rate fell 0.03% to 6.7475. The US 10-year Treasury yield fell 0.27% to 108.16. The Dow Jones Industrial Average fell 0.97% to 51,711.65.
Recent Developments
Iran Conflict Continues: US Economic "Safety Net" Fails, Diesel Prices Become Key Barometer
The energy market turmoil triggered by the Iran conflict is exposing the US economy to unprecedented fragility. The inventory and capacity "safety nets" that once cushioned oil price shocks have been significantly depleted. Even if the intensity of the conflict is lower than its initial stages, the war will continue to erode the living standards of Americans.
The most critical economic indicator to watch now is not gasoline, but diesel prices. "Diesel is undoubtedly the lifeblood of the US economy," noted an energy strategy head at Rabobank. Last week, US diesel benchmark prices surged nearly 34 cents to $5.13 per gallon, marking the largest single-week gain since the first week of the conflict. Diesel prices directly determine aviation fuel surcharges and nationwide logistics costs, subsequently pushing up the prices of almost all goods.
The root of the problem lies in refinery capacity bottlenecks. US refinery utilization rates have reached 96.1%, operating near their physical maximum, making further increases in output difficult. EIA data shows that inventories at the key crude oil storage hub in Cushing, Oklahoma, have dropped to "tank bottom" levels, while the US Strategic Petroleum Reserve has fallen to 311 million barrels, the lowest since March 1983.
Compounding the supply tightness is the ongoing Russia-Ukraine conflict. In the past three months, Ukraine has attacked 24 of Russia's 34 largest refineries, transforming Russia from a diesel exporter to an importer. Meanwhile, while Brent crude oil prices have risen to around $96 per barrel, this indicator is now less economically significant than the retail prices consumers actually pay.
Although June CPI data offered a temporary respite, the impact of rising energy prices is likely merely delayed, not dissipated. A survey found that 37% of US voters are using credit cards more frequently for daily expenses due to higher food and gasoline prices, a 6 percentage point increase since April. The White House has released oil from the SPR and relaxed shipping restrictions, but the effectiveness of these tools has likely been priced in by the market.
Oil prices are unlikely to fall until the conflict is completely resolved. Analysts predict that gasoline and diesel prices will remain high at least until Labor Day, with some relief only after demand declines. In the long term, surging demand will eventually drive the construction of new refineries, but this takes time, leaving no short-term solutions.
Hormuz Stalemate Catalyzes Energy Corridor Reconstruction: Billions in Pipeline Investments Accelerate, Middle East Oil Map Undergoes Historic Shift
Prior to the conflict, approximately 15 million barrels per day of Persian Gulf crude oil transited the Strait of Hormuz. With the geopolitical stalemate persisting, Gulf states are accelerating at least seven major pipeline projects aimed at redirecting more crude to ports on the Red Sea, the Suez Canal, and the Gulf of Oman.
Saudi Arabia's East-West Pipeline and the UAE's pipeline to Fujairah are both operating near full capacity. Their combined pre-conflict spare capacity of approximately 3.5 to 5.5 million barrels per day has been nearly entirely absorbed by the current crisis.
Abu Dhabi is accelerating the construction of a $3 billion, 300-kilometer parallel pipeline to the port of Fujairah, targeting an additional supply capacity of over 1.2 million barrels per day. The project is roughly 50% complete and was originally scheduled for completion early next year, but market institutions believe a mid-year completion is more realistic due to port expansion needs.
Iraq is also actively planning alternative export routes. These include pipelines from its southern Basra oil fields to Turkey's Ceyhan port and Syria's Banias port, as well as restarting discussions with Jordan on a pipeline to the port of Aqaba for exports via the Red Sea or Suez Canal.
Goldman Sachs analysis indicates that new pipeline capacity bypassing the Strait of Hormuz could reach 3.8 million barrels per day by the end of next year and potentially 7.3 million barrels per day by the end of 2028. By then, roughly 60% of the Gulf region's pre-conflict total exports of 23 million barrels per day could avoid a strait blockade.
However, these alternative routes are not a panacea. Pipelines delivering crude to the Mediterranean would deviate from the primary demand centers in Asia, ultimately requiring a longer and more costly voyage around the southern tip of Africa. Red Sea exports still face the risk of attacks from Yemen's Houthis, and the Suez Canal cannot accommodate very large crude carriers (VLCCs).
A more complex and expensive challenge is LNG. Before the conflict, approximately one-fifth of the world's LNG, primarily from Qatar, also transited the Strait of Hormuz. The engineering scale and geopolitical coordination required for alternative gas pipeline projects are far greater than for crude oil.
From a market psychology perspective, the long-term reconstruction of energy flows will reshape regional premium structures. Geopolitical risk premiums for countries hosting pipelines will be repriced, while detour costs and capacity bottlenecks could support the floor for oil prices over an extended period.
Sources: CPC Terminal Halt in Black Sea Causes Sharp Drop in Kazakhstan Oil Output; Tengiz Field Output Halved
Sources report that Kazakhstan's average daily oil production has dropped significantly after the suspension of loading at the CPC terminal in the Black Sea. On Wednesday, Kazakhstan's crude and condensate production fell 21% from its July average of 2.07 million barrels per day to 1.63 million barrels per day.
Sources also indicate that production at Kazakhstan's Tengiz oilfield fell to 406,000 barrels per day on Wednesday, well below its July average of 925,000 barrels per day, a decline of 56%.
The Kazakh Energy Ministry stated that consultations are underway to resume oil exports as soon as possible. The Caspian Pipeline Consortium (CPC) confirmed its facilities are safe and ready to resume exports.
Institutions Upgrade 2026 Oil Deficit to 1.5 Million bpd, but 2027 Surplus Risk Looms
A survey of analysts shows that the Middle East conflict has doubled the expected global oil market deficit for 2026 to 1.5 million barrels per day. Prior to the Iran conflict, the market had anticipated a supply surplus of around 1.6 million barrels per day in 2026, marking a significant reversal in expectations.
The Iran conflict has effectively shut the Strait of Hormuz, severely curtailing crude oil production and exports from the Gulf region. This has prompted institutions to significantly lower their near-term supply forecasts. Brent crude has already gained approximately 28% in July, following its largest single-month gain since 1988 in March.
Looking ahead to 2027, however, the survey predicts the market will swing back to a surplus of around 1.9 million barrels per day. Key drivers for this shift include a recovery in Gulf exports after the Strait of Hormuz reopens, OPEC+'s gradual unwinding of production cuts, continued production growth in the US and Latin America, and a downward revision in demand expectations from China due to the electrification effect.
Analysis suggests that if navigation in the Strait normalizes, global oil inventories could return to their February 2026 peak levels by the end of the first quarter of 2027, and could even surpass the highs seen during the 2020 pandemic period. However, this outlook is highly dependent on the speed of the strait's reopening and the willingness of ship owners to return to that route.
From a trading perspective, the market is caught in a tug-of-war between near-term supply shocks and expectations of a far-term surplus. Any substantive progress on a ceasefire or the reopening of the Strait could trigger a rapid price correction, while further deterioration of the geopolitical situation would continue to support the risk premium.
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