Oil Markets Adapt as US-Iran Conflict Disrupts Middle East Shipments

Oil markets are adapting to disruptions in Middle East shipments due to the ongoing US-Iran conflict. The situation remains unstable and unpredictable, with new signs of a possible pause in hostilities.

The Strait of Hormuz has become increasingly volatile, with volumes falling sharply since mid-June. Iran has retaliated against US ships crossing the strait, while its allies among the Houthis in Yemen have targeted Saudi tankers attempting to pass through the Bab el-Mandeb Strait.

Physical supply of crude oil from the Middle East remains limited, with small volumes passing through Hormuz and Bab el-Mandeb. The alternative route through the Suez Canal is longer and more expensive, requiring partial unloading of cargo due to draft restrictions.

The Brent price fell nearly 5% to $92.06 a barrel in early Asia trade at the start of the week, but rebounded roughly 45% to around $102 per barrel by July 23. However, this rally reversed, and current prices remain below the peak of $139.13 per barrel reached in February 2022 during Russia's invasion of Ukraine.

The market is showing an ability to adapt, with supply chains being redirected and alternative sources emerging. Despite real disruptions in crude oil supplies, futures do not necessarily reflect the worst-case scenario.