Conflict between the US and Iran has reignited, putting the Strait of Hormuz under renewed threat, and this time the global oil market has no remaining safety net.
Brent crude futures have gained over 10% this week, briefly surpassing $87 per barrel to reach a new high in over a month. According to reports, the US administration has notified Israel it is deploying additional air power to the region, suggesting American military action could expand as soon as this weekend. Concurrently, the US military has conducted airstrikes on Iran for an eighth consecutive night. Iran's Supreme Leader has emphasized that the US will receive a "memorable lesson," while an Iranian deputy foreign minister announced the suspension of a US-Iran understanding.
Several energy traders warn that supply disruptions from this conflict will be far more severe than the last round, as the strategic and commercial inventories previously used to buffer such shocks were nearly exhausted in the earlier crisis. "We have exhausted all cushions, all of them. It's all gone now," one trader stated bluntly.
Military Escalation Persists with No Signs of Retreat
Reports indicate the US Central Command announced a new round of airstrikes on Iran, aiming to "further degrade Iran's ability to threaten shipping in the Strait of Hormuz and swiftly punish" attacks on a US base in Jordan. Two US soldiers were reportedly killed in a missile and drone attack in Jordan, bringing the total US military deaths since late February to 16. US officials believe Iran's recent attacks demonstrate it still possesses ample missile stocks and improved capabilities to evade US air defenses. Iran's Revolutionary Guards claim to have destroyed several aircraft at an air base.
Iran's Supreme Leader issued a statement declaring that repeated US violations of an understanding prove the US President's signature is "worthless and invalid," warning the US will "pay a heavier price" for attempting to provoke war. An Iranian deputy foreign minister stated Iran has stopped implementing the understanding, suggesting the US should "choose other solutions if it is wise."
Strait of Hormuz Nearing Paralysis as Shipping Data Deteriorates Sharply
An analyst at UBS noted in a daily tracking report that the situation in the Strait has escalated further, with the number of oil and gas tankers transiting plunging to just one. The daily average for July has been around 10 vessels, a significant drop from over a dozen in late June/early July and far below the roughly 50 vessels seen in February.
In terms of cargo flow, the average July outflow to date is about 5.4 million barrels of oil equivalent per day, compared to 3.7 million in June and 1.3 million in May. Crude loadings from the Gulf (excluding Iran) plummeted to 1.0 million barrels per day on Wednesday from 6.0 million the previous day. The weekly average of 3.2 million barrels per day is below the July average of 5.1 million.
The report also noted loadings from ports outside the Strait, like Saudi Arabia's Yanbu and the UAE's Fujairah, have also seen recent slight declines. The analyst believes the path to normalizing Strait of Hormuz flows has been disrupted as the US and Iran spiral into escalation, and "any sustained reopening has been postponed."
Cushioning Inventories Depleted, Leaving No Path Out of Supply Crisis
The International Energy Agency (IEA) disclosed on Friday that member countries have released about three-quarters of the emergency stockpile of 400 million barrels announced in March, meaning this buffer source has only a few weeks of supply left. The founder of Energy Aspects noted that before the US-Iran conflict, the global oil market had about 400 million barrels of excess inventory, excluding government strategic reserves. "And now we have almost nothing... The market's complacency on Hormuz flows is being severely tested."
Data shows fuel markets have tightened significantly, with the ICE diesel crack spread closing at a record high and the Nymex heating oil crack at its strongest since March. Reports cite energy traders warning that during the last crisis, a combination of record strategic stockpile releases by Western nations and China cutting imports and using state company inventories managed to cap Brent crude at a peak of $126 per barrel, well below historical highs. This time, few such tools remain available.
An analyst at Natixis wrote in a report: "Ultimately, the market had been pricing in an optimistic flow trajectory that is now clearly off the table, at least until a new round of diplomatic efforts emerges."
Refined Product Markets Also Under Pressure, Impacting Consumers
Beyond crude, refined product markets are also under significant strain. Since the US-Iran conflict erupted, European wholesale diesel futures have risen 14% this week. Retail gasoline and diesel prices are rising quickly and falling slowly, with consumers already feeling the impact.
The IEA warned on Friday of potential supply tightness risks in gasoline and diesel markets. Additionally, Russia's diesel exports have been impaired following Ukrainian drone strikes on its refining system, further squeezing global diesel supply. Countries like Turkey and Brazil, which previously bought Russian diesel, are now forced to compete with Western nations for alternative supplies.
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