Oil Prices Jump as Gloves Come off in Middle East

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Written by Daniel Graeber for IIR News Intelligence (Sugar Land, Texas)

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Summary

U.S. President Donald Trump during the weekend again vowed to obliterate Iran after a tenuous truce collapsed. Shipping lanes remain dangerous.

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Peace Optimism Evaporating

Crude oil prices were in rally mode again on Monday amid heightened tensions in the Middle East, with Industrial Info continuing with its coverage of impacts to the global energy sector.

June enthusiasm over the signing of a 14-point memorandum of understanding to end the conflict has faded as both sides returned to military fighting. Among the points of the agreement was safe passage through the Strait of Hormuz, through which roughly 20% of the world's crude oil and liquefied natural gas (LNG) passes.

On Monday, Iran through its official Islamic Republic News Agency reported that safe passage is no longer guaranteed. A volley of fire was traded between the U.S. and Iranian militaries this weekend, after U.S. President Donald Trump said the tacit truce was over.

The price of oil was climbing again on Monday. The price for Brent crude oil, the global benchmark, was up nearly 4% before the opening bell to move near $79 per barrel. It had moved higher than $115 during the height of the conflict.

John Evans, an analyst at London oil broker PVM, said in a Monday newsletter that traffic was improving nonetheless, with some vessels apparently turning off their satellite trackers to get through.

"Oil prices have little choice then other than react to the upside with the prevailing effects being a rundown in equity enthusiasm and a rally in the value of the U.S. Dollar, the place where scared money seems to run to at present," he wrote.

Various analyses are pointing to an increase in supplies as the year winds down, though that's largely dependent on a resolution to the fighting. With Israel telling Trump of an Iranian assassination plot against him, however, it's unclear how soon the fighting would end.

On Monday, Trump took to his Truth Social platform to declare the United States is the "guardian" of the Strait of Hormuz and that the U.S. was "reinstating" a blockade on Iran in the strait.

"But as such, and as a matter of FAIRNESS, (the U.S.) will be reimbursed, at the rate of 20% on all cargo shipped, for any and all costs necessary to do the job of providing safety and security to this very volatile section of the world," he posted.

Supply-Side Buffers are Scarce

Currently, however, pressures remain given the drain on emergency stockpiles. Parties to the International Energy Agency are tapping emergency reserves to provide a buffer to the supply-side shocks from the war.

The U.S. Strategic Petroleum Reserve is halfway depleted, according to the U.S. Department of Energy. In its latest weekly refinery report, meanwhile, Industrial Info found that refinery runs declined from the last week of June, while outages were higher than expected because of inclement summer weather.

Though it's expected to be a mild hurricane season, it only takes one major storm to sideline the refinery sector along the U.S. Gulf Coast and supply-side buffers are increasingly scarce.

Consumers, meanwhile, are already under pressure from inflationary and trade-related strains. The International Monetary Fund (IMF) recently lowered its forecast for international economic growth due to conflict in the Middle East and the demand strains from artificial intelligence.

"Risks to the outlook are more balanced than in April but still tilted to the downside," according to the IMF report. "The possibility of renewed Middle East conflict looms large and could extend commodity price volatility, further threaten supply chains, raise prices, and weigh on financial conditions."

By the Numbers

• 4% jump in Brent crude oil prices on Monday
• 20% of waterborne oil, gas still impeded

Key Takeaways

• Fighting resumes in the Middle East, renewing market tensions.
• Supply-side pressures could ease, but there are many "ifs" involved.

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