Oil Holds Near $88 as Hormuz Deadlock Risks $140 Spike

Brent crude holds near $88 as fading Hormuz deal hopes leave traders bracing for a supply shock analysts say could reach $140.

Brent crude held near $88 a barrel Tuesday as prospects for a quick reopening of the Strait of Hormuz faded, with analysts warning a prolonged closure could push prices to $140 by the fourth quarter.

Traders are "confident that we can get to some sort of agreement, even if it may be a fudge," said Modupe Adegbembo, an economist at Jefferies. "It may not be a great agreement, but it may be something that allows more oil and more things to flow through the Strait of Hormuz."

WTI crude rose 0.09% to $82.22 a barrel, while Brent edged to $87.80 in early Asian trading. Both benchmarks jumped more than 5% in the prior session, their highest since July 31, after U.S. President Donald Trump demanded compensation from Tehran for people killed in wars, attacks and protests. Prices remain well below last month's surge above $100 and the May peak above $110, after sliding more than 7% last week on hopes that Iran and Oman were close to a deal.

The waterway carried a fifth of the world's oil and liquefied natural gas before the conflict began in late February. If the deadlock persists, the market could hit a "tipping point" around the start of the fourth quarter, said Kieran Tompkins, senior climate and commodities economist at Capital Economics — consistent with prices of $120 to $140 a barrel based on historical form.

Tehran has set out a series of conditions for reopening the strait, including compensation for war damage, the lifting of sanctions, the release of frozen Iranian funds and a permanent end to hostilities against Iran and its regional allies. Iranian Foreign Ministry spokesman Esmail Baghaei said Monday the strait would remain closed until Washington ended its naval blockade, telling a press briefing that "a maritime blockade is not a diplomatic action that we can lift through diplomacy."

Foreign Minister Seyed Abbas Araghchi said Sunday there were no active negotiations with the United States, and that talks could not restart until Washington stopped violating the 14-point memorandum of understanding that established a temporary ceasefire. Technical discussions with Oman on a revised maritime route were nearing completion, he said, though "this does not mean the opening of the Strait of Hormuz."

Trump, who said the U.S. had control of the strait and had swept the waterway for Iranian mines, told Axios on Sunday that Washington was "low-keying" negotiations while economic pressure on Tehran builds. "We are only semi-negotiating with them. We are just watching Iran with its huge inflation and the fact they have no money," he said, adding "It's like a chess game."

China Demand and Houthi Strikes Add to Bullish Set-Up

Wider market factors that have cushioned the supply shortfall — alternative export routes, lower demand and a surge in production — are showing signs of strain. China "singlehandedly balanced the market in May with its cut-back in oil imports," said Amrita Sen, founder and director of research at consultancy Energy Aspects, warning that with Chinese crude imports recovering in July and set to rise further in August, "crude can't stay down forever."

Markets have been quick to price in the prospective normalization of shipping flows on any hint of a deal, rather than the full reality of ongoing physical supply constraints, Sen said. That also includes continued Houthi strikes on infrastructure in Saudi Arabia, a key source of market stability. "The crude set-up is more bullish on a fundamental basis," she said.

The last time crude spiked to $126 a barrel in the earlier phase of the conflict, the surge was far sharper than the current move, reflecting the market's initial shock at the closure of a waterway that has historically carried around a quarter of the world's seaborne oil trade. If the current deadlock runs into next week, market moves won't be so "benign," Adegbembo said, as traders are forced to ratchet up the implied chance of a prolonged closure.

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