Crude Oil to Hold $90-$110 Range as Iran War Persists

Crude oil is set to consolidate between $90 and $110 per barrel as the U.S.-Iran war shows no sign of easing, disrupting supply through the Strait of Hormuz and draining strategic reserves worldwide.

David McAlvany, chief executive at McAlvany Financial Group, said the outlook for crude remains highly volatile as the U.S.-Iran war shows no sign of easing as of Monday's trading session, making the case for prices to consolidate in the $90 to $110 range in the near term.

The U.S. Strategic Petroleum Reserve has tumbled below 300 million barrels for the first time since the early 1980s, according to Department of Energy data, as Washington releases 172 million barrels in response to the supply disruption. The reserve will sit at around 243 million barrels once the drawdown is complete. The national average for U.S. gasoline reached $4.06 per gallon on Monday, up from $3.14 a year earlier, according to AAA.

The sustained conflict is forcing major importers to pay a heavy price. Japan's crude oil import bill hit a record $89.46 billion in June, and 90 percent of Japanese companies reported that rising energy prices are hurting their operations, according to a Teikoku Databank survey. With the Strait of Hormuz effectively closed to tanker traffic, the IEA has coordinated a global release of 400 million barrels from strategic reserves.

Strategic Reserves at Risk

The rapid drawdown of the SPR has raised concerns about the integrity of the salt caverns that store the oil. The reserve's inventory has fallen below 300 million barrels for the first time since it was filled in the early 1980s, and experts warn that further depletion risks damaging the caverns themselves.

"The practical operational floor for the crude inventory is between 250 million and 300 million barrels," said Siddharth Misra, a petroleum engineering professor at Texas A&M University. At current inventory levels, "cavern integrity and overall operational capability are at an elevated risk," he said.

The Government Accountability Office said in a May report that "repeated partial drawdowns followed by refill can leach a single part of a cavern repeatedly, leading to undesirable shapes." Energy Department officials told the GAO they are "holding the SPR infrastructure together with 'Band-Aids,' and that it is uncertain how long they will hold."

Amos Hochstein, a senior energy advisor to President Joe Biden, disputed the Energy Department's claim that 70 million barrels is the safe minimum. "Don't believe the people out of the government that are saying the SPR can go to 70 million barrels. It's nonsense," Hochstein told CNBC's "Squawk Box" Thursday. At that level, the reserve would be depleted to "the point of never resurrecting it," he said.

Supply Alternatives Take Years

The U.S. and its allies are pursuing alternatives to Hormuz transit, but none offer near-term relief. An Iraqi plan to develop a pipeline exporting oil through Syria is expected to take four years to reconstruct and cost at least $15 billion, according to Reuters, citing two sources with knowledge of the project.

Treasury Secretary Scott Bessent told Reuters last week that "more than 50 percent or 70 percent" of oil exports typically passing through the Strait of Hormuz will be exported through underground pipelines. "Over the next two years, the strait is going to become irrelevant. It is going to become just another body of water," Bessent said.

The plan has received financial support from the U.S. and energy executives from companies including Chevron, ConocoPhillips and Qatar's UCC Holding, which signed on to a pipeline deal in June. Iraq, which has been greatly impacted by the shutdown, previously had a pipeline linking its northern Kirkuk region to the Mediterranean port of Banias in Syria, but past wars left it badly damaged and it has not been in regular use since the 1980s.

Japan, which depended on the Middle East for 90 percent of its crude oil supply, has scrambled to diversify purchases, importing cargoes from as far as Canada, Azerbaijan and Africa. In April, Japan imported the lowest volume of crude oil from the Middle East on record dating back to 1979.

The economic cost of these workarounds is steep. With Brent and WTI benchmarks trading in the $90 to $110 range, energy costs are feeding into inflation across major economies. If the conflict persists through the fourth quarter, analysts expect the elevated price band to hold, with any escalation toward the Strait of Hormuz naval blockade potentially pushing prices higher.

This article is for informational purposes only and does not constitute investment advice.