Oil's path to $120 accelerates as Iran chokepoints tighten

The oil market's five-month run of resilience faces its sternest test as supply disruptions at two critical chokepoints compound with each passing month of the Iran conflict.

Brent crude topped $100 a barrel Thursday for the first time since May, as the Iran conflict simultaneously choked traffic through the Strait of Hormuz and the Bab-al-Mandeb strait, cutting off more than 12 million barrels a day of supply routes.

"The conflict has entered a decidedly more dangerous phase that could shift the sentiment of the 'the market always finds a workaround' camp," said Helima Croft, head of global strategy at RBC Capital Markets.

Iran's attacks on tankers in the Strait of Hormuz have frozen most crude traffic through the waterway, forcing the market to reroute about 7 million barrels a day via pipelines to the Red Sea, according to JPMorgan. Now the Houthi blockade of the Bab-al-Mandeb strait has blocked another exit point for roughly 5 million barrels a day of Saudi oil. Saudi Arabia can reroute that oil north through the Suez Canal, but the largest fully laden tankers cannot navigate the canal's depth constraints, said Natasha Kaneva, head of global commodities strategy at JPMorgan. A typical four-week trip becomes an eight-week journey.

The compounding disruptions threaten to push oil past the 2022 high of $128 a barrel and potentially toward a new record above $150 if a full regional war breaks out, Croft said. Goldman Sachs head of oil research Daan Struyven sees oil testing $120 by October if the status quo persists.

Insurance Void Leaves Tankers With No Path Out

Lloyd's Market Association, the group representing maritime insurance agents, has introduced a new clause that could effectively trap vessels inside the strait. Paying Iran's re-imposed tolls of $1 to $2 per barrel of oil violates US sanctions and can void a vessel's entire insurance policy, LMA said. With Iran insisting it has the right to attack ships that exit without paying, vessels have effectively no path out of the strait. Only 44 vessels remain inside the Strait of Hormuz, compared with 97 just before the US-Iran memorandum of understanding, according to Kpler analyst Naveen Das.

The insurance crisis compounds a broader supply squeeze. Ukrainian drone attacks on Russian refineries and the Caspian Pipeline Consortium terminal in the Black Sea have created a significant new problem for global energy markets. Russia, facing a massive fuel shortage, banned diesel exports — removing 800,000 barrels a day, or 12 percent of global diesel shipments, from the market, according to Andy Lipow, president of Lipow Oil Associates. The Black Sea pipeline attacks threaten to remove an additional 1.7 million barrels a day of crude supply.

Global Inventories Drain as China's Stockpile Cushion Fades

The most fundamental shift since the war began in March 2026 is the drawdown of global crude inventories, which have tumbled by 1.3 billion barrels over five months, according to Dan Pickering, chief investment officer at Pickering Energy Partners. The US Strategic Petroleum Reserve has been drawn down by 116 million barrels to its lowest level since 1983, with just 60 million barrels remaining before it hits its congressionally mandated floor. US commercial inventories are nearing their operational minimums, at which point physics no longer allows oil companies to force crude through pipelines with gravity alone.

China, the world's biggest oil importer, had stockpiled crude before the war and has relied on those reserves to avoid importing at high prices. But that cushion has about three to four months before it runs out, Kaneva said. Once China returns to the market, demand will accelerate just as supply routes remain constricted.

Before the war, WTI crude traded in the high-$50s to low-$60s a barrel. It briefly touched $112 in early April before settling into a range above $100 through mid-May. By late June, NYMEX oil had fallen back to $73.60 as demand destruction and China's stockpile usage temporarily eased pressure. Thursday's move back above $100 signals that the relief may be short-lived.

The oil market is now in a race against time. Demand destruction has so far kept prices from surging, but each additional month of disruption erodes the buffers that have prevented a full-blown crisis. If the Strait of Hormuz remains effectively closed and China exhausts its stockpiles, the conditions for a spike above $120 — and potentially toward $150 — will align by the fourth quarter.

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