It doesn’t look like the market is counting on US-Iran deal to get hammered out soon, and oil prices are inching up again as a result.
A lack of progress on a peace deal to end the nearly six-month-old war and reopen the critical Strait of Hormuz is once again being felt in the oil market, with crude prices steadily climbing in recent days.
As far as the energy market is concerned, the Strait of Hormuz is likely to remain closed — leaving the huge hole in the world’s oil supply in place and threatening to push prices back to multi-decade records. Iran said this week that the Strait, which handled 20% of the world’s oil flows before the war, will remain closed until the US meets its demands or until Donald Trump’s term is over in 2029.
President Donald Trump, meanwhile, said he would demand reparations from Iran for the war, leading investors to price out a resolution.
Brent crude, the international benchmark, rose 1% on Tuesday and briefly broke past $90 a barrel as traders took in the latest developments. US oil prices climbed 1% to top $83.
Industry experts have warned that global oil reserves are dangerously low and that another price spike is likely if stockpiles aren’t refilled soon. Stocks in the US Strategic Petroleum Reserve declined to the lowest levels in 43 years last week.
Tuomas Malinen, a Finnish economist and a professor at the University of Helsinki, said he believes America’s oil reserves are approaching “the danger zone.”
In a recent post on Substack, he estimated that, were it not for the price “manipulation” stemming from the US releasing more of its oil reserves, crude prices would likely be trading around $150 to $200. Prices that high would cause severe demand destruction, leading consumers to pull back on oil products and pushing the US economy into a recession, he wrote on Monday.
“When the ‘sudden stop’ in the flows from the SPR occurs, the whole global energy system will go haywire. Oil prices will skyrocket, the stock markets will tank, and the US is likely to experience the most rapid onset of a recession in its history,” Malinen said of his bear case, speculating that the US may eventually withdraw from the war to avoid severe economic repercussions.
HFI Research, another research firm that has warned of the dangers posed by dwindling oil supplies, laid out two scenarios for how the oil situation could progress.
In one, Iran wins control over the Strait, prolonging the energy supply shortage and sending oil prices to “extremely elevated” levels.
In another, the US escalates against Iran, destroying more energy infrastructure and sending oil prices to extremely elevated levels all the same. Previously, the firm floated the possibility that Brent would surpass its 2008 peak to hit $150 a barrel.
“The oil market will never be the same again,” HFI wrote in a Substack post on Monday.
Helima Croft, the global head of commodity strategy at RBC Capital Markets, said the market was likely facing additional supply pressures from Ukraine’s recent attacks on Russian energy infrastructure.
Europe may feel the brunt of the world’s supply shortage, as referring the continent relies on the US for much of its energy supply, though there’s now increased competition for US oil and other energy products. In an interview on CNBC, she warned of a bidding war between America, Europe, and Asia for American energy cargoes if there isn’t a resolution in the war soon.
Francisco Blanch, the head of commodities and derivatives at Bank of America, also said he expects further upside for oil prices if traffic doens’t significantly increase through the Strait of Hormuz.
“We need to see roughly ten times the flow of ships of normalize prices and prevent an escalation into the winter,” he told CNBC this week.