Key Takeaways:
Crude oil prices have steadied near $90 a barrel as stalled diplomatic efforts to end the Middle East conflict leave traders weighing short-term selling pressure against the risk of prolonged supply disruption through the Strait of Hormuz.
WTI crude hovered near $89 a barrel Tuesday as stalled Middle East peace talks kept the Strait of Hormuz closed, with traders balancing near-term selling pressure against the risk of prolonged supply losses.
"The market is caught between the reality of a supply shock and the hope of a diplomatic resolution that keeps getting pushed back," said Zaheer Anwari, co-founder and CEO at The Revacy Fund.
Front-month WTI futures traded at $89.17 a barrel late Monday, up 1.1% after the US launched retaliatory strikes on Iran following the downing of an American Apache helicopter near the Strait of Hormuz. Brent crude settled at $95.23 on June 7 before paring gains. The waterway, through which roughly one-fifth of the world's oil passes, has remained effectively closed since hostilities erupted Feb. 28, cutting global crude supplies by about 14%, according to Societe Generale.
The longer the Strait remains shut, the more acute the supply deficit becomes. J.P. Morgan analysts estimate a June reopening would keep Brent near $100 for the rest of 2026, while a prolonged closure could add $5 to $15 a barrel in the second half as inventories deplete. Societe Generale warns the market will ultimately need higher prices to rebuild strategic reserves and fund new production.
The 14% loss in global crude supply has pushed prices about 30% higher since the conflict began — a far smaller move than the 134% surge that followed the 1973 OPEC oil embargo, which cut off just 7% of supply. Multiple factors have absorbed the shock: strategic petroleum releases from the US, Europe and Japan, increased output from Brazil and Venezuela, and Saudi Arabia rerouting flows around the Hormuz chokepoint.
But the single largest offset has come from China. Beijing slashed crude imports to just under 9 million barrels a day by late May from 11.7 million a day in February, a reduction of almost 3 million barrels a day that represents about 74% of the global decline in imports, according to J.P. Morgan. Rory Green, head of emerging markets macro and strategy at GlobalData TS Lombard, said China's rapid electrification of energy production and transportation since 2022 has shifted the country from an energy balance toward a "substantial surplus," helping to cap prices well below the $200-a-barrel level some analysts had feared at the outset of the conflict.
OPEC+ signals resolve despite output constraints
OPEC and its allies agreed Sunday to raise output by about 188,000 barrels a day in July, the fourth consecutive monthly increase, in a move widely seen as symbolic given that the war has choked off exports through the Strait. Seven members including Saudi Arabia, Russia and Iraq backed the hike, signaling the cartel's intent to maintain market influence even as the United Arab Emirates exited the group earlier this year.
The output pledge comes as the market faces a split outlook. Fitch analysts said a late July reopening of the Strait would cause Brent prices to "fall sharply," averaging $70 a barrel from September, describing the current spike as a "temporary logistical supply shock" rather than a lasting loss of production capacity. J.P. Morgan's base case of a June reopening keeps Brent at around $100 for the rest of the year.
Societe Generale, however, argues the equilibrium price is structurally higher. Strategic reserves will need rebuilding, existing stockpiles require incremental supply, and new oil production needs stronger returns to move forward, the bank's commodity analysts led by Mike Haigh said. "Taken together, the longer-term equilibrium price for oil is likely higher than what the current forward curve implies," they wrote.
For now, the market remains hostage to diplomacy. Each fresh exchange of fire — Iran's missile barrage on Israel on June 7, the US strikes on Monday — resets the clock on any potential reopening of the Strait, keeping the risk premium embedded in crude prices. Traders are watching for any sign of progress in US-Iran talks, but with both sides trading blows rather than proposals, the path to lower prices remains blocked.
This article is for informational purposes only and does not constitute investment advice.
