Oil prices fall as markets weigh prospects of Hormuz reopening

Oil prices declined on Thursday as markets pondered the potential reopening of the Strait of Hormuz, amid escalating tensions between the United States and Iran. US crude prices fell beneath US$83 a barrel, while Brent crude dipped near US$88, as investors balanced hopes for diplomatic progress with uncertainty surrounding the conflict and its impact on a vital global energy pathway.

President Donald Trump asserted that the United States had complete control over the Strait of Hormuz, while negotiations between Washington and Tehran remained stalled. The administration is also escalating economic pressure on Iran following a military campaign that failed to compel Tehran to surrender. This includes tightening sanctions and enforcing a naval blockade designed to restrict Iranian oil exports, heightening the likelihood of further supply disruptions in the global energy market.

The International Energy Agency's latest monthly report projected a global oil market deficit of 1.8 million barrels per day this quarter, as the ongoing conflict continues to disrupt energy flows in the Middle East. However, this prospect of tighter supplies was mitigated by a significant surge in US crude inventories. According to EIA data, domestic crude stocks surged by 17.4 million barrels last week, marking the largest weekly increase since early 2023.

Markets also digested fresh US inflation data, which somewhat alleviated concerns over the Federal Reserve's interest-rate outlook. US consumer prices edged up in July, with core prices (excluding food and energy) rising 0.2% month-on-month and 2.5% year-on-year. The annual rate of increase mirrored its weakest pace since March 2021.

Despite the moderation in inflation, the Strait of Hormuz remains the paramount geopolitical risk for oil markets. As a crucial global energy chokepoint, any prolonged disruption could reignite upward pressure on crude prices, even with weaker demand expectations and rising US inventories. Consequently, investors are keenly observing any signs that Washington and Tehran can overcome their negotiating impasse and reach an agreement to reopen the strait.