While the market has already priced in 'decent geopolitical risk,' which could cap the upside, there are reasons why the downside may also be quite limited
A Gambia-flagged tanker is seen anchored in the Strait of Hormuz, off Bandar Abbas in southern Iran.
The oil market didn't bat an eye after reports Thursday of tankers hit by mines in the Strait of Hormuz. The market may soon reach a point, however, where the dust finally settles enough to see the true chaos the eight-month-old conflict in the Middle East and its shipping disruptions have wrought upon the global crude sector.
"Reality is settling in," said Bob McNally, president at Rapidan Energy Group. Oil markets have begun to "shed the entrenched optimism about a quick and durable end to the war disruption."
Optimism peaked around Independence Day, said McNally, who is a former energy adviser to President George W. Bush. "The market has now priced in decent geopolitical risk."
That could help explain why oil prices on Thursday traded lower even after three tankers struck mines and caught fire as they attempted to exit the Strait of Hormuz through an unauthorized route, the Associated Press reported, citing Iran's Islamic Revolutionary Guard Corps.
The reports were "taken with a grain of salt" by the market, which instead moved lower as previous buyers booked some profits and prices pulled back from recent highs, said Gary Cunningham, director of market research at energy-consulting firm Tradition Energy.
But "the $100 level is ours for awhile," he said - regardless of any new attacks, and maybe even for some time after hostilities ease. "The supply picture is simply too tight."
Ongoing concerns about flare-ups in the region following the start of the U.S.-Israel's war on Iran in late February have lifted prices for both U.S. and global benchmark crude above $100 a barrel. On Thursday, West Texas Intermediate crude futures (CL00) fell, but settled at $102 a barrel, while Brent crude (BRN00) declined but settled above $110.
In fact, Brent crude this year has spent the most time above $100 since 2022, the year the Russia-Ukraine war began, according to Dow Jones Market Data. Brent has traded above $100 a total of 85 times so far this year, versus 123 times in 2022.
Contributing to growing concerns in the global oil market is the fact that supplies in the market are set to tighten even without further flare-ups in the region.
China is starting to raise imports and the global release of emergency oil reserves are almost done, said McNally.
Data from Kpler show that Chinese imports of crude have been climbing since reaching a decade-low in June of 6 million barrels per day.
China has increased imports as more crude has cleared the Strait of Hormuz in the past couple of months, aided by U.S. involvement, said Matt Smith, Kpler's U.S. lead analyst. Still, "China is very savvy and is not charging back into the market, buying crude hand over fist, when prices are in triple digits and freight rates are so high."
McNally said flows through the Strait of Hormuz have "impressively recovered" much of their loss, but at a high cost. Those costs include high tanker freight rates, which keep consumer oil prices high.
A deal to end the conflict could potentially bring oil prices down, but the market would still have damaged energy facilities and inventories to rebuild, said Louis LaValle, co-founder and chief executive at Frontier Investments.
President Donald Trump has repeatedly said that oil and gasoline prices will come down quickly when the conflict is over. But Trump is "making a return to cheap oil sound much easier than it's likely to be," said LaValle.
"That gives us a reason to expect elevated prices for longer, though I'd hesitate to call $100 a hard floor," he said.
-Myra P. Saefong
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