The Strait of Hormuz is back under 'full-conflict conditions' - and energy markets are scrambling

By Claudia Assis

Oil prices surge as U.S. and Iran trade strikes; even without further disruption, volatility appears here to stay for energy markets

Tanker traffic through the Strait of Hormuz has nearly stopped after attacks on ships and a return of hostilities between the U.S. and Iran.

Ratcheted-up tensions in the Middle East and a soured cease-fire between the U.S. and Iran have put the brakes on Strait of Hormuz transits and renewed worries about crude supply and stockpiles.

Investors scrambled to analyze the setbacks as President Donald Trump said at a NATO gathering in Turkey on Wednesday that he doesn't expect the Iran war to restart. Trump also said earlier in the day that he thought the cease-fire was over.

Late Wednesday, the U.S. military said it had launched new airstrikes against Iranian targets.

A few things were clear, however - there's less confidence that the June agreement signed by both countries could still evolve into permanent peace, and energy markets were thrown back into uncertainty. Crude futures prices (BRN00) (CL00) surged on Wednesday and showed that they remain highly sensitive to escalations around the strait.

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"I would caution that we're still very far from normal," said Rob Barnett, head of global commodities at Bloomberg Intelligence. "The oil market is in a pretty significant crunch, and inventories are significantly depleted from where we were at the start of the conflict."

As the U.S. and Iran agreed to a 60-day cease-fire in mid-June, some investors felt the world could find itself with an oversupply of oil, at least for the near term as some of the ships that had been trapped around the Strait of Hormuz finally sailed to their destinations.

Even as some traffic resumed through the strait over the past couple of weeks, flows are still a fraction of what they were before the conflict, Barnett said.

"We still see the market as being in a deficit, and until you really have a true, lasting agreement where you start to see the ships flowing through the region, we are going to be in a deficit mindset," he added.

Vessel movements through Hormuz fell sharply Wednesday. The strait "is once again operating under full-conflict conditions," analysts at Windward Maritime said. A partial normalization building up since mid-June "has effectively collapsed," they added.

Conditions deteriorated after Iran on Tuesday allegedly attacked three oil tankers transiting the strait, and the U.S. retaliated by striking more than 80 targets in Iran. Iran's next volleys targeted U.S. military sites in Bahrain and Kuwait.

Earlier Tuesday, the Treasury Department revoked a general license authorizing Iranian oil sales, effectively reinstating sanctions that had been lifted under the interim agreement.

On Wednesday, the U.S. Energy Information Administration said that U.S. commercial crude-oil inventories, excluding barrels in the Strategic Petroleum Reserve, rose by 3 million barrels in the week ending July 3. Inventories, at 411.4 million barrels, are about 6% below their five-year average for this time of year, the EIA said.

Gasoline inventories also fell from last week and are 6% below their five-year average, while inventories of distillate fuel such as diesel are about 12% below their five-year average.

"Even if no sustained physical disruption materializes, uncertainty around vessel safety, insurance costs, potential delays and the risk of further retaliation is likely to keep volatility elevated in the near term," analysts at Rystad Energy said in a note.

-Claudia Assis

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07-08-26 1632ET