Oil hits three-week high as Hormuz shipping fears grow amid Iran tensions

On Wednesday, oil prices surged to a three-week high due to concerns over the safety of ships navigating the Strait of Hormuz and ongoing tensions between Iran and the United States. Brent crude oil futures increased by 45 cents, or 0.49%, reaching $91.47 a barrel, while US West Texas Intermediate (WTI) crude futures rose by 45 cents, or 0.53%, to $85.39 a barrel.

The price increase was primarily driven by uncertainty surrounding the Strait of Hormuz, with traders unsure if ships can safely pass through the strategic waterway. Tim Waterer, chief market analyst at KCM, stated that confidence in safe passage remains low, adding that the uncertainty is keeping an extra geopolitical risk premium in oil prices.

The geopolitical risk premium refers to the additional cost traders pay for oil due to fears of conflict disrupting supplies.

The Strait of Hormuz, a crucial energy route, is responsible for carrying a large portion of global oil and liquefied natural gas. Any significant disruption in the waterway could lead to global energy supply concerns, pushing oil prices higher. Currently, shipping volumes are below normal levels, and shipping through the Strait of Hormuz remains heavily disrupted, according to Ahmad Assiri, research strategist at brokerage Pepperstone.

Disagreements over conditions for shipping in the waterway are still ongoing, contributing to the increased risk premium in oil prices. This situation is further compounded by the fact that US President Donald Trump announced there were no ongoing talks with Iran, while Iran claimed that the Strait of Hormuz remained closed. Following the temporary ceasefire agreement's expiration, senior Iranian officials indicated that Iran was moving towards a more aggressive military stance due to diplomatic efforts reaching a stalemate. However, there were no reported strikes by either side on Tuesday.

Iraq is taking steps to ensure its crude oil exports continue despite the regional uncertainty. The Iraqi government approved a new system to export Iraqi crude through specialized international and local companies via multiple export outlets starting from September 1. This move aims to help Iraq maintain oil exports through alternative routes while shipping conditions remain uncertain.

The rise in Brent crude oil prices to above $91 a barrel suggests that traders are incorporating a higher risk premium into oil prices, with the potential for further increases if tensions persist. Traders are closely monitoring US oil inventory data, as changes in US fuel inventories can provide insights into demand and supply in the world's largest oil-consuming market.

Additionally, official US inventory figures from the Energy Information Administration (EIA) are due on Wednesday, and analysts surveyed by Reuters expect a decrease of around 600,000 barrels in US crude oil stocks for the week ending August 14. A decline in crude inventories could provide further support for oil prices if it indicates tightening US oil supplies.

At present, uncertainty surrounding the Strait of Hormuz remains the primary driver of the market, with traders closely observing shipping activity, the Iran conflict, and US inventory data for any potential shifts in oil prices.