If the oil market seemed volatile earlier this year, the past couple of weeks have made that look like another day at the office. After the memorandum of understanding (MoU) between Washington and Tehran promised a smooth reopening of the Strait of Hormuz and brought Brent briefly bobbing down to the low $70s, the conflict has now reignited with a vengeance and taken the oil price with it. Brent surged 7.9% in a single session on Wednesday (29 July) to close at $90.74 as Trump vowed to hit Iran hard following a ballistic missile attack on US forces. As of today (30 July), Brent is trading at $89.43, up more than 18% in just the past month. However, oil topped $100 a barrel for the first time since May just last week (23 July) after Yemen's Houthi rebels targeted Saudi vessels in the Red Sea, threatening to cut off yet another crucial route for oil exports already severely reduced by the near-closure of the Strait. What began as a single-chokepoint crisis in February has evolved into something considerably more dangerous, and the market is only just beginning to price in what that means.
By and large, the situation is being driven by two sets of forces that are now feeding one another in worrying ways. The first is the fragile and repeatedly violated state of the ceasefire. The second is the structural supply-and-demand damage the conflict has already inflicted on global energy markets. Neither is resolving quickly, and both carry significant implications for where oil goes from here.
A ceasefire in name only
The June MoU was supposed to be a turning point, but sadly, it has become a prime example of the distance between diplomatic documents and reality. As the ceasefire rapidly unravelled amid mutual accusations of violations, tanker attacks in the Strait resumed and Iran-backed militias in Iraq launched drones at oil facilities in Saudi Arabia's Riyadh and Eastern regions, prompting joint US-Saudi retaliatory strikes. The Houthis, meanwhile, declared a maritime embargo against Saudi Arabia and claimed attacks on two tankers in the Red Sea, putting approximately 2.5 million barrels per day of Saudi oil exports at risk at a time when Hormuz traffic is already at a standstill, according to Rystad Energy. Saudi Arabia has confirmed that its oil production capacity has been reduced by roughly 600,000 barrels per day following attacks on energy facilities, while a major pipeline designed to bypass the Strait of Hormuz was also struck.
When taken together, the implications of this two-fronted embargo are severe. The Strait of Hormuz and Bab el-Mandab Strait together represent close to 40% of the global oil supply. With both straits and the East-West workaround pipeline all under direct threat, it's hard to see a ceiling for oil in case of fresh escalation. Iran has also rejected Oman's proposal for shared 50-50 control of the Strait of Hormuz, maintaining that Tehran must retain full control of the inbound shipping lane and part of the outbound route, which leaves precious little room for the kind of compromise that would allow commercial traffic to normalise. API data showed US crude oil inventories fell by a further 3.3 million barrels last week, pointing to continued tightening even as new diplomatic talks are reportedly underway. And if the past five months have taught the market anything, it's that these kinds of talks ought to be treated with considerable scepticism.
Demand destruction and the supply paradox
Beneath the headline volatility of tanker attacks and Trump's unceasing ultimatums, the structural picture that has emerged for the global oil market is one of deeply contradictory signals that make forecasting particularly difficult. On the demand side, the war's damage has been substantial, as shown in the latest data. The EIA forecasts that global oil consumption will fall by an average of 1.2 million barrels per day in 2026, with 0.8 million barrels per day of this decrease concentrated in non-OECD economies, with Asia the worst affected due to its geographic vulnerability to Gulf supply disruptions. Even with the IEA projecting a seasonal rebound in consumption through the summer travel period, global oil demand is expected to decline by 1 million barrels per day for the full year, with the recovery hinging entirely on the dangerous assumption that Strait flows gradually normalise.
On the supply side, the picture is equally muddy. Global oil supply is expected to fall by 3.9 million barrels per day on average across 2026 to 102.4 mb/d, though Gulf supply losses have been partly offset by robust non-OPEC+ growth from the Americas, with US SPR releases and expanded production from Brazil, Canada and Guyana boosting Atlantic Basin crude exports to markets east of Suez by 3.5 mb/d since the war began. OPEC+ too faces an ironic dilemma. Much of its theoretical spare capacity sits in the very Gulf fields that are either closed off or inaccessible due to the conflict. The IEA noted that refinery margins have surged to four-year highs, with diesel and gasoline markets tightening sharply even as crude oil markets appear better supplied. This disconnect is driven largely by the fact that key Gulf export refineries have not yet resumed operations. For investors, all they can do is wait for a durable diplomatic breakthrough to cut through the noise of ceasefire rumours and bombastic rhetoric. The EIA projects demand will rebound by 2.0 million barrels per day in 2027 once prices ease and supply flows fully return, but that assumption requires a peace that, as of this morning, neither side appears remotely close to delivering.
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