Oil prices rise above $80 per barrel as Middle East conflict intensifies
Oil prices climbed above $80 per barrel as renewed U.S.-Iran military conflict disrupted Strait of Hormuz shipping.
Objective Facts
On July 15, WTI crude reached $80.77 per barrel and Brent crude hit $86.44 per barrel, marking the biggest jump in one week since April. Tensions escalated after the collapse of a fragile truce in June, leading to renewed fighting between Iran and the U.S. Early on July 15, the U.S. military confirmed a new round of air strikes intended to degrade Iranian capabilities targeting commercial shipping in the Strait of Hormuz. President Donald Trump announced the reimposition of a naval blockade on all Iranian ports, and later abandoned his demand that ships transiting the Strait of Hormuz pay a fee for U.S. military protection. By July 17, oil prices rose further after Kuwait said Iran attacked a power and water desalination plant, with Brent crude advancing 4.6% to close at $88.10 per barrel.
Deep Dive
The latest outbreak of fighting stems from conflicting U.S. and Iranian interpretations of how Hormuz was supposed to reopen under an interim peace deal signed on June 17. According to Reuters, analysts said Iran has been signalling it may use its Houthi allies in Yemen to shut the Bab el-Mandeb gateway to the Red Sea, a move that could broaden the conflict with Washington and threaten two of the world's most important energy routes. Trump declared the United States was the "GUARDIAN OF THE HORMUZ STRAIT" and proposed charging a 20 percent fee on cargo shipped through the waterway before abandoning the plan a day later. Trump relented after the shipping industry largely opposed the fee, and the International Maritime Organization, a United Nations agency, said mandatory tolls in the strait are illegal. Prices have fluctuated since the start of the conflict earlier this year, as Iran was effectively able to close the Strait of Hormuz, a key oil shipping channel off its coast. Goldman Sachs estimated in a note that Gulf exports recovered to more than 80% of pre-war levels after the U.S.-Iran memorandum of understanding in June but slipped back below 50%, or about 11 million bpd, over the last week, and said Brent could exceed $110 in the fourth quarter this year if Gulf export recovery continues to stall. Still, investors are cautious to apply too much of a premium on oil prices, given the back-and-forth headlines—Saxo Bank head of commodity strategy Ole Hansen said "This is just all part of the war games" and "the market has learned to adopt a little bit of a sanguine approach to some of these big announcements, simply in the sense that they often do not actually materialize." Prospects for a peace deal have deteriorated, as negotiations stalled, Iran rejected navigation proposals, and both Washington and Tehran hardened their rhetoric over control of the Strait of Hormuz. Goldman Sachs analysts estimate that 45% of exports from the region will be insulated from the Strait by 2027 and more than 60% (or 14 million barrels per day) by the end of 2028, suggesting that long-term exposure to Hormuz disruptions may decrease over time despite near-term volatility.
Regional Perspective
Iranian officials continued to insist that the U.S. must respect Iran's sovereignty over the strait if it wants shipping to return to prewar levels, with Iranian army spokesman Brig. Gen. Mohammad Akraminia stating Iran's conditions for reopening the strait were strict adherence to the Islamabad Memorandum of Understanding and recognition that Iran will retain control of the waterway, adding that Washington's attempt to route shipping through Omani waters amounted to an "alternative route" that violated the memorandum's terms. Kpler's head of Middle East and OPEC+ Amena Bakr told The National that "Twenty per cent is really high. If you're talking about $80 barrel, that's $16 on the barrel" and noted that "No country has the right to apply tolls on a natural waterway." For Gulf exporters, the renewed restrictions threaten oil exports after Iran had briefly restored shipments during the earlier ceasefire, while attacks involving UAE tankers highlighted the risk of a broader regional conflict. All Persian Gulf nations showed declines in exports of oil and other fuels, though those nations that were able to avoid shipping bottlenecks through the Strait of Hormuz (Saudi Arabia through pipelines to the Red Sea, and Oman via geography) saw increases in revenue, while those that could not avoid the strait (Iraq, Kuwait, Qatar and the United Arab Emirates) saw declines in revenue. Due to rising tensions in the Middle East, Japanese refiners asked the government to release some of their stockpiled oil, as Japanese refiners obtain about 95% of their crude oil from Saudi Arabia, Kuwait, the United Arab Emirates, and Qatar, with about 70% of this Middle Eastern oil delivered to Japan by ships that pass through the Strait of Hormuz.