The rally was driven by continued uncertainty surrounding the conflict and severely impaired shipping through the Strait of Hormuz. Just four commodity vessels transited the waterway on Thursday, well below the recent 10-day average of approximately 15, underscoring the continued disruption to a key global energy supply route.

Fuel markets remain particularly tight, with U.S. diesel prices reaching record highs. Supply disruptions affecting Middle Eastern production and Russian refining capacity, combined with declining distillate inventories, have pushed average U.S. diesel prices to approximately $5.85 per gallon. Higher diesel costs are also increasing inflationary pressures across transportation, agriculture, and other sectors.

Analysts raised their near-term oil price outlooks as the reopening of Hormuz continues to take longer than expected. Citi increased its third-quarter Brent forecast to $86 per barrel, while ANZ raised its short-term forecast to $95, citing additional upside risk if the conflict intensifies.

Meanwhile, Iraq increased August oil exports to approximately 2.34 million barrels per day from 1.35 million bpd in July, providing some additional supply. However, analysts noted that this week’s price rally appears driven primarily by geopolitical uncertainty and fears of future disruptions rather than evidence of a significant new decline in physical Middle Eastern exports.

With military tensions continuing, Hormuz traffic remaining far below normal levels, and refined fuel supplies tightening, oil markets ended the week carrying a significantly elevated geopolitical risk

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Renewed U.S. strikes on Iran and additional threats from Israel against Iranian infrastructure kept geopolitical risks elevated. The market is watching closely to see whether this week’s military escalation develops into a broader and more sustained conflict that could further disrupt regional energy flows.

Shipping through the Strait of Hormuz remains severely constrained, with just six commodity vessels transiting the waterway on Wednesday, down from 11 the previous day and well below the 10-day average of approximately 13. Iran has also expanded its list of vessels deemed non-compliant and subject to fines, seizure, or detention.

Offsetting some supply concerns, comments from Russian President Vladimir Putin suggesting openness to peace negotiations with Ukraine raised the possibility of reduced attacks on Russian energy infrastructure and a potential normalization of fuel supplies. Iraq has also increased oil exports, reaching approximately 2.34 million barrels per day in August compared with 1.35 million bpd in July.

With global inventories continuing to decline and Hormuz traffic remaining far below normal levels, oil prices remain supported by a substantial geopolitical risk premium despite signs that additional supply from Iraq and a potential easing of Russian disruptions could provide some relief.

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The latest escalation marked the largest exchange of fire between Washington and Tehran since July, with U.S. forces striking targets along Iran’s southern coast and Iran retaliating against U.S. positions across the region. The renewed fighting has increased uncertainty surrounding physical oil flows through the Strait of Hormuz, where shipping traffic remains severely restricted.

Only four commodity vessels transited the strait on Wednesday, below the recent 10-day average of approximately 13. Iran also indicated that renewed U.S. attacks could further restrict maritime traffic, although alternative supply routes and workaround shipments have helped prevent a more severe supply shortfall.

Additional support came from a larger-than-expected draw in U.S. crude inventories. Commercial crude stocks fell by 4.5 million barrels last week, significantly exceeding expectations for a 1.1 million-barrel decline.

Meanwhile, OPEC+ is expected to maintain its current output policy for October, while ongoing attacks on energy infrastructure in Ukraine and Russia continue to add uncertainty to global energy markets.

With military tensions escalating, Hormuz traffic remaining constrained, and U.S. inventories declining sharply, oil markets continue to carry a substantial geopolitical risk premium despite the availability of alternative supply routes.

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The rally accelerated after the U.S. launched new strikes against Iranian targets, diminishing hopes that last weekend’s exchange of attacks would remain contained. Tehran responded defiantly, warning it would prevent oil exports from the Gulf, while continued threats to commercial shipping reinforced concerns over the effective closure of the Strait of Hormuz.

Supply concerns are also contributing to a sharp increase in refined fuel prices. Global refinery disruptions, particularly in the Middle East and Russia, have pushed diesel prices sharply higher. U.S. diesel futures reached a 52-month high, while refining margins climbed to record levels as fuel supplies tightened.

Markets are now watching U.S. inventory data for signs of additional supply pressure. Analysts expect crude inventories to have declined by approximately 800,000 barrels in the week ending August 28, which would mark the first weekly inventory draw in five weeks.

With direct military action escalating and shipping through Hormuz remaining severely constrained, markets are pricing in a significantly higher geopolitical risk premium and the growing possibility of sustained global supply disruptions.

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The rally followed an exchange of military strikes between the U.S. and Iran, marking the first direct escalation between the two sides in roughly a month. The renewed conflict forced traders to rebuild a geopolitical risk premium as prospects for a near-term de-escalation weakened.

Supply concerns remain centered on the Strait of Hormuz, where mediation efforts to restore normal shipping traffic have stalled. Visible commodity vessel traffic through the waterway averaged just five vessels per day over the weekend, although some Gulf oil exports continue to move through the strait, limiting the upside in prices.

Meanwhile, U.S. Strategic Petroleum Reserve inventories fell by approximately 3.1 million barrels last week to 286.6 million barrels. The Trump administration has indicated it intends to use Venezuelan oil secured through a potential agreement to begin replenishing the SPR, which has fallen to near its lowest level in more than four decades.

With direct military action resuming and Hormuz negotiations showing little progress, oil markets have once again shifted toward pricing a higher near-term risk of supply disruption.

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Oil prices remained under pressure as diplomatic efforts to reopen the Strait of Hormuz gained momentum. Mediators are working with Iran on conditions for restoring normal traffic, while shipping flows through the waterway showed signs of a tentative but uneven recovery. Seven commodity vessels transited the strait on Thursday, down from 17 the previous day and below the 10-day average of 15.

At the same time, concerns over tighter monetary policy added pressure to crude prices after Federal Reserve Chairman Kevin Warsh indicated that interest rates could be raised later this year to contain inflation. The prospect of higher rates weighed on expectations for economic growth and future oil demand.

Supply risks remain elevated, however, as disruptions continue across the Middle East and Russia. Recent estimates put Gulf oil exports at 15–16 million barrels per day, still 7–8 million bpd below pre-war levels. Meanwhile, continued Ukrainian attacks on Russian refineries are tightening global refined-product supplies.

With Hormuz traffic gradually recovering and diplomatic efforts gaining traction, the market is beginning to price in some easing of the supply disruption, although continued geopolitical risks and uneven shipping flows are keeping significant uncertainty in the oil market.

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The rebound followed reports that the Trump administration is not interested in returning to the terms of the memorandum of understanding reached with Iran in June. Washington also confirmed that it is not currently engaged in talks with Tehran, despite renewed diplomatic efforts by regional mediators.

The lack of progress toward a broader agreement caused investors to scale back expectations for a near-term increase in Middle Eastern oil supplies. The United States remains focused on applying additional economic pressure on Iran, while Tehran has continued to push back against the sanctions and warned against further escalation.

Shipping through the Strait of Hormuz showed some improvement, with 10 commodity vessels transiting the waterway on Wednesday. While higher than recent lows, traffic remained below the 10-day average of 15 vessels and far below pre-conflict levels. Before the war began in late February, the Strait of Hormuz handled approximately one-fifth of global daily oil and liquefied natural gas supplies.

Some regional refining capacity has also begun returning, with Kuwait’s 615,000-barrel-per-day Al-Zour refinery restarting all three crude units and operating at approximately 60% capacity as of August 19.

With diplomatic efforts continuing but no direct negotiations between the United States and Iran underway, uncertainty surrounding the Strait of Hormuz and Middle Eastern oil flows remains a key source of support for crude prices.

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Both benchmarks fell to their lowest levels since August 10 during the session as hopes for increased shipping activity through the Strait of Hormuz weighed on prices. Losses were later limited after U.S. inventory data showed a smaller-than-expected increase in commercial crude stocks.

U.S. crude inventories increased by just 95,000 barrels to 428.9 million barrels for the week ending August 21, compared with expectations for a 597,000-barrel increase.

Market sentiment has shifted as Iran and Oman work toward an agreement governing shipping through the Strait of Hormuz. Progress toward a negotiated arrangement has raised expectations that traffic through the waterway could gradually increase, potentially reducing the geopolitical risk premium that has supported crude prices.

Shipping activity, however, remains well below normal levels. Only five commodity vessels transited the Strait of Hormuz on Tuesday, compared with a 10-day average of 15 vessels and significantly below pre-war traffic levels. Before the conflict began at the end of February, the waterway handled roughly one-fifth of global oil and gas supplies.

Broader diplomatic efforts to reduce tensions also continued, with Pakistan reporting progress in discussions with Iran and Qatar preparing additional talks with Iranian officials.

Meanwhile, supply disruptions linked to the Russia-Ukraine war continued. Russia’s NORSI refinery, the country’s fourth-largest refinery and second-largest gasoline producer, suspended crude processing following a Ukrainian drone attack.

Growing expectations for increased shipping through the Strait of Hormuz continued to weigh on crude prices, although traffic remains severely constrained and ongoing disruptions to Russian energy infrastructure are limiting the market’s downside.

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The market’s focus shifted toward economic pressure after the United States announced expanded sanctions targeting Iran and its trading partners. The measures were viewed as less immediately disruptive to oil supplies than renewed military action, particularly as details surrounding the targeted countries and the timing of potential penalties remain unclear.

Despite the sharp decline, supply risks remain elevated. An oil tanker was struck and disabled by an unidentified projectile near Oman’s coast, while shipping activity through the Strait of Hormuz continued to deteriorate. Only two commodity tankers transited the waterway on Monday, the lowest daily total since early May.

The Strait of Hormuz remains a critical concern for global energy markets, as roughly one-fifth of global oil consumption moved through the waterway before the conflict began on February 28. Continued restrictions have contributed to the drawdown of both commercial and strategic petroleum inventories as countries work to offset disrupted supplies.

Additional disruptions were reported outside the Middle East. Ukraine struck the Novoshakhtinsk oil refinery in Russia’s Rostov region, forcing the facility to suspend operations, while a fire broke out at Kazakhstan’s Atyrau refinery.

While the shift toward economic pressure reduced some immediate concerns about further military escalation, severely restricted shipping through the Strait of Hormuz and continued attacks on energy infrastructure leave significant supply risks in place.

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The United States expanded the scope of secondary sanctions that could be imposed on entities and countries maintaining business ties with Iran, increasing economic pressure on Tehran as the conflict approaches the six-month mark. However, the announcement had a limited immediate impact on oil prices, as markets had largely anticipated additional measures following earlier warnings from the Trump administration.

The effectiveness of the new sanctions will depend heavily on enforcement and whether Iran’s remaining major customers, particularly China, reduce their purchases. Iranian officials continued to call for a diplomatic resolution, while mediation efforts involving regional countries remained underway.

Shipping through the Strait of Hormuz also remained constrained, although enough crude continues to move through the waterway to prevent a more severe supply shock. Fewer than 20 commodity vessels transited the strait over the weekend, but producers and traders continue to find ways to move barrels through the region. Iraq’s SOMO and QatarEnergy have continued offering crude for loading inside the strait, while some major oil companies have maintained shipments despite higher transportation costs.

The pullback reflects a shift toward profit-taking after last week’s sharp rally rather than a significant improvement in supply conditions. With oil continuing to flow through the Strait of Hormuz, the market has so far avoided the severe supply disruption that would likely be required to push Brent toward significantly higher levels. However, continued restrictions on shipping and the potential for additional sanctions or military escalation are expected to keep geopolitical risk elevated.

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