A still-blocked Strait of Hormuz. Tanker attacks. U.S.-Iran peace talks at an impasse.
Six months ago, any one of those factors would have sent oil prices back above $100 a barrel. But when confronted with these headlines in August, the energy market barely flinched.
The more surprising story isn’t what’s happening in the world’s most important crude chokepoint — it’s why the oil market no longer seems to care as much as it did just a few months ago.
Somewhere between the ever-changing headlines and the price chart, the oil market lost its appetite for panic. Oil prices have practically gone nowhere this month — with the most active Brent contract, for October delivery, down just 1.7% so far in August, at $88.52 a barrel on Friday afternoon. The West Texas Intermediate crude contract for September delivery was off 2.7% during the same period, settling at $82.40 last week, according to FactSet data.
That doesn’t mean the situation in the Strait of Hormuz is any closer to being resolved, despite the near-constant drumbeat of headlines touting U.S.-Iran talks.
Transit through the Strait of Hormuz appeared to grind to nearly a standstill after two more ships were attacked just last week and the U.S. said it could maintain a naval blockade of Iran indefinitely. Talks between Washington and Tehran to pause the military strikes also appear to have stalled as both sides continue to publicly issue demands.
Treasury Secretary Scott Bessent said the U.S. will soon announce unprecedented “economic isolation” against Iran, intensifying President Trump’s effort to force Tehran’s capitulation after almost six months of war.
Oil prices are not higher because the war is winding down, or because the Strait of Hormuz is any closer to reopening. The real reason is that the world is learning to live without using as much oil as it used to. Indeed, that might be a more troubling story: Economists say that weak crude demand could be a harbinger of economic weakness ahead.
World oil demand could fall further than previously expected this year, according to the International Energy Agency. The IEA now forecasts that demand will drop by 1.6 million barrels a day in 2026. That’s 510,000 barrels a day more than its last monthly prediction in July, as elevated fuel prices are putting further downward pressure on oil use.
Some analysts have ventured to say that diminished demand could keep a lid on oil prices through the rest of the year, even if traffic through the Strait of Hormuz doesn’t fully recover.
Analysts at Eurasia Group said in a report that they expect a U.S.-Iran de-escalation in September, which would allow for a partial reopening of the strait. But even if Strait of Hormuz traffic doesn’t recover past 30% to 50% of prewar levels, “the flow of oil is likely to be sufficient to meet demand,” they said. That could see oil futures fall within a band between $65 a barrel and $80 a barrel, the analysts noted.
To be sure, there is reason to allow for a bit of leeway here. It’s worth noting that the IEA, like other agencies such as the U.S. Energy Information Administration and the Organization of the Petroleum Exporting Countries, has a tendency to underestimate crude demand. Most of their adjustments are always to the upside, Phil Flynn, senior market analyst at the Price Futures Group, told MarketWatch via phone on Friday.
A surprise build in U.S. commercial crude inventories also helped keep oil futures in check last week. The EIA showed a surprise — and major — build in U.S. commercial inventories of oil, thanks to fewer crude exports and a jump in imports, mostly from Venezuela.
The commercial stockpiles, which exclude oil held in the U.S. Strategic Petroleum Reserve, rose by 17.4 million barrels to end the week to Aug. 7 at 424.4 million barrels. A usual weekly build is around 1 million barrels to 5 million barrels.
Despite ongoing challenges in the Middle East, this marked the second-largest crude inventory build in history, according to Matt Smith, an analyst at Kpler. Analysts polled by the Wall Street Journal were looking for a drop of 600,000 barrels.
Oxford Economics analysts said they no longer believe that a formal U.S.-Iran deal is in the cards. Instead, they expect a prolonged series of halting starts and stops to the conflict, causing flows through the Strait of Hormuz to continuously fluctuate. That could leave Brent averaging in the mid-$80 a barrel through the rest of 2026.
“Despite extended disruption, we expect prices to trend down and [Persian] Gulf exports to gradually recover as intermittent strait transit, informal arrangements and additional bypass capacity reduce lost supply, while ample global inventories and subdued Chinese demand continue to cushion the market,” they said.
“The market is less concerned that we’re going to have this global shortfall forever — so the longer it goes on, the less of an impact it is, because [of] the market’s dynamic and finding ways about it,” Flynn of the Price Futures Group said.
Crack spreads
While demand for crude has eased, that ultimately might not prove to be as big of a boon for consumers as many might expect.
The recent subdued action in crude belies a bigger problem brewing in refined products such as gasoline, diesel and jet fuel. This could ultimately matter more to consumers’ pocketbooks than the action in oil itself, according to Tracy Shuchart, senior economist at NinjaTrader.
The spread between the cost of producing a barrel of gasoline and the cost of the crude oil needed to produce it — known among traders as the “crack spread” — has widened sharply. It recently reached its highest level on record, according to FactSet data.
That’s mainly because global refining capacity for finished fuels is severely constrained by geopolitical conflicts and facility disruptions, even as crude supplies remain relatively stable.
“Many people are still in the loop that something is going to come out on the positive side of this world [conflict], and that’s why prices are depressed. But everybody’s too focused on front-month crude prices because that’s not where the stress is right now,” Shuchart told MarketWatch in a phone interview on Friday.
“Cracks are at record record highs, and the product market is screaming,” she said.
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