NEW DELHI: Escalating tensions between the United States and Iran have triggered a fresh rally in global crude oil prices. Over the last fortnight, WTI crude has climbed from around $73 to cross $80 per barrel, while Brent crude is currently trading above $85 per barrel.
The latest spike is fueled by fears of supply disruptions following heightened tensions in the strategic Strait of Hormuz. Analysts note that the oil market is currently balancing between these geopolitical risks and weak global demand. However, volatility is expected to persist until the situation in the Strait of Hormuz stabilizes.
The strategic weight of the Strait of Hormuz
The Strait of Hormuz remains one of the world’s most critical oil transit chokepoints, handling approximately 20 to 25 percent of the global oil and gas supply. Any military escalation or disruption to vessel movement along this route directly threatens global energy supplies. Following recent Iranian actions and subsequent US sanctions, the market has factored in a fresh risk premium on fears of imminent supply bottlenecks.
Brent’s rollercoaster ride
The oil market has witnessed severe volatility this year. Driven by geopolitical conflicts, Brent soared near $120 per barrel between February and April. It subsequently cooled down to around $70 following a ceasefire on June 17. However, the respite was short-lived as fresh tensions over Hormuz on July 12 triggered another sharp rally, pushing Brent past the $85 mark within weeks.
Multiple factors driving the rally
Geopolitics isn’t the only factor holding oil prices high. According to Mohammed Imran, Research Analyst at Sharekhan by Mirae Asset, the US Strategic Petroleum Reserve has hit multi-decade lows, adding pressure to global inventories.
Furthermore, continuous Ukrainian drone strikes on Russian refining infrastructure have hit production. Russia’s decision to ban diesel exports in July has further squeezed the availability of refined fuel in the global market, triggering a diesel crunch in Europe.
Refined fuel under pressure
Analysts point out that the real pressure is visible in refined products like diesel rather than raw crude. A combination of reduced Russian supplies and output disruptions at West Asian refineries has intensified Europe’s diesel shortage. While US refineries are operating at high capacities, they are stretched thin trying to cater to both their domestic market and European demand, keeping refined product prices elevated.
OPEC+ losing grip on prices
Concurrently, the influence of OPEC+ appears to be waning as member nations continue to pump more oil. Countries like the UAE, Saudi Arabia, Kuwait, Iraq, and Qatar are aggressively offering deeper discounts to Asian buyers to secure market share. This indicates that controlling global prices solely through production cuts is becoming increasingly difficult for the cartel.
The EV factor
In the long term, the rising adoption of electric vehicles (EVs) is beginning to impact global oil dynamics. EV sales are growing rapidly in several Asian countries, including India, which is expected to gradually slow down the growth rate of petrol and diesel demand. However, experts believe that immediate supply-side risks currently outweigh this gradual slowdown in demand.
What lies ahead?
Market experts project that oil prices will remain highly sensitive to any geopolitical developments involving the US and Iran in the coming months. While an easing of tensions could bring quick relief, any further deterioration in the Strait of Hormuz will trigger another price spike.
Imran forecasts that Brent crude will trade within a wide range of $74 to $95 per barrel over the next three to six months. WTI is expected to trade generally $4 to $6 lower than Brent. The global diesel shortage and refined fuel crunch are likely to persist for a few more months, keeping the energy market volatile.
