Oil market starts pricing in a prolonged Hormuz crisis

The oil market is increasingly anticipating disruptions to Middle East energy supplies as a permanent reality following the ongoing conflict between the United States and Iran. Diplomatic efforts to reach a resolution have stalled, with both sides unwilling to compromise on the future of the Strait of Hormuz, the world's most vital oil chokepoint.

As a result, crude oil prices have stabilized around $90 a barrel, nearly 50 percent higher than at the beginning of the year despite a decline in panic levels. The conflict is exacting economic costs on both Iran and the US, with Iranian inflation surging to 80 percent in July and crude exports plummeting to 294,000 barrels per day from 1.7 million bpd in 2025, according to analytics firm Kpler.

The US, meanwhile, is grappling with high fuel costs, which have risen by 29 percent from a year ago, according to the American Automobile Association. While diplomats remain stalemated, the oil market is adapting, with traders facing significant uncertainty over the extent of supply disruptions. Flows through Hormuz have fallen to 2 million bpd in August, while alternative routes are under pressure due to Houthi blockades.

Despite these challenges, global refined fuel markets are tight, with global refinery throughput 5 million bpd below pre-pandemic levels. The situation is further exacerbated by seasonal maintenance ahead of winter and hurricane season, which could strain US refining capacity. As the Hormuz impasse persists, the oil market is grappling with the implications of opaque supply flows, dwindling fuel inventories, and strained refining capacity, highlighting the shifting nature of global oil trade.