Oil went on one of its tears again as U.S.-Iran tensions ratcheted higher this week. Yet despite the scary headlines, crude could soon be heading lower.
The Iran war conflict has flared up again, disrupting the flow of goods through the critical Strait of Hormuz -- and sending oil prices higher. The price of Brent crude traded around $101 per barrel on Friday, and was up about 42% from its multi-month low of $71 hit in early July, before ending the day at $96.78.
But the market has seen this movie before, and the recent rally seems to have hit its limit. That isn't just because the war's spillover effect on oil production could subside -- the Federal Reserve and China could contribute to some downside, too.
While the recent move in oil prices has frightened the market, the price has largely been range-bound. Since the Iran war started in late February, Brent crude has traded between around $70 and $118, peaking in early May after news about continued U.S. naval blockades in the region. The range suggests that as long as the conflict doesn't significantly intensify or if crude supply doesn't become much more squeezed, oil likely won't surpass those recent highs.
In fact, a decline seems more likely. The most obvious catalyst for such a drop is what's commonly known as "the Trump put," or the price level at which the president decides the conflict creates too much risk for the economy. At that point, he would likely indicate -- as he often has -- that he wants to negotiate a resolution with Iran. Negotiations were partly responsible for a major drop from peaks back in May.
But the war isn't the only driver for crude. The Fed's next move could have an impact, as markets are betting the central bank will raise interest rates this year to bring down inflation. Tighter monetary policy would pressure economic demand, including for energy. Much will depend on coming inflation reports, but if odds of a September rate hike inch closer to 100% from their current 80% chance of any number of hikes today, oil could be headed for a fall.
The U.S. isn't the only country that has a say in the matter. One of the reasons oil prices didn't spike as much as some had predicted was how Chinese companies -- important global buyers -- manage their oil supplies. Many tend to buy oil when prices are low, but "that pattern reverses when prices surge," writes Ryan Fitzmaurice, Senior Commodity Strategist at Marex. "The net effect of this behavior has been to keep oil prices range bound and mean reverting."
In other words, elevated oil prices are likely keeping Chinese buyers out of the market right now, resulting in one major source of downward pressure on crude. That's what happened earlier this year. Chinese government data show daily average purchases of oil barrels dropped by about 16% from the two-month January and February period to the March-April period when prices had soared. Oil prices essentially went nowhere from late March to early May, and then saw a brief drop before the most recent rally.
Recent reports showed China came into the war having already accumulated massive reserves, and recent estimates from the Energy Information Administration shows the country may hold just over three times the amount of strategic crude inventory than the U.S. That means, according to Fitzmaurice, China can draw on its inventories and "wait it out" at these prices.
Of course, nothing in markets is guaranteed. Trump's threats of further attacks on Iran this week raise the possibility that even more oil supplies will see damage, writes Hamad Hussain, economist at Capital Economics.
"The bigger picture...is that the broader escalation in the conflict has raised the risk of oil prices remaining higher for longer," Hussain added.
Maybe so. But it will require a lot of bad news to bring oil to new highs, and signs suggest that crude has peaked.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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July 24, 2026 16:40 ET (20:40 GMT)
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