Hormuz Stalemate Raises Oil Price Risk to $120

For months, oil prices have been volatile due to the ongoing war and disrupted oil flows at the Strait of Hormuz. Despite hopes for a U.S.-Iran deal that would free up millions of barrels of oil and refined products, negotiations have stalled, leading to a stalemate over control of the strait.

The Strait of Hormuz remains mostly closed, with traffic at two-month lows. Analysts say if the stalemate persists, the physical oil market could reach a tipping point within weeks, beyond which shortages would be felt and prices will spike. The crude oil futures market has been driven by sentiment and hope for an imminent reopening, but global inventories are depleting.

China's tentative return to increased oil imports is also contributing to the tightening of fuel markets. The International Energy Agency flagged tight fuel markets and high refining margins in its monthly Oil Market Report. The agency noted that despite a monthly increase in refinery crude throughputs, global refinery capacity remains unable to offset product supply bottlenecks.

Analysts are pointing to the risk of $120 oil if tanker traffic at the Strait of Hormuz does not begin to pick up soon. Saxo Bank's Ole Hansen wrote that until the strait reopens and production visibly recovers, volatility will remain a defining feature. The futures curve may provide evidence of just how tight the underlying energy market has become.