Strat of Hormuz Tensions Erode Oil Market's Safety Cushion

Oil prices remain volatile due to ongoing geopolitical tensions in the Strait of Hormuz and Bab el-Mandeb. According to recent statements from Qatari and U.S. officials, progress has been made in negotiations between the two countries, but Iran has denied direct contact. This uncertainty continues to impact oil prices, which have experienced a full cycle since the outbreak of the conflict.

Since mid-June, WTI crude oil prices declined from around $85 per barrel to below pre-conflict levels, effectively erasing the geopolitical risk premium. However, by mid-July, attacks on vessels in the Strait of Hormuz and Red Sea pushed prices back above $90 per barrel.

The market has adjusted to these risks, but its margin for error has significantly narrowed. The U.S. Strategic Petroleum Reserve currently stands at around 310 million barrels, far below its pre-2022 release level of approximately 700 million barrels, the lowest since 1983. OECD oil inventories remain persistently below normal, and refined product stocks are also tight.

The market's buffering problem concerns not only crude oil availability but also the accessibility of refined products. As Asian demand has declined noticeably compared to pre-conflict levels, equivalent to a significant share of global oil demand, this could generate substantial additional demand against a backdrop of tightening supply.