Oil logs worst day in 2 months on US pause of Iran strikes

WTI crude fell the most in two months Monday as the US paused strikes against Iran, easing fears of a prolonged supply disruption through the Strait of Hormuz.

"The pause removes the immediate threat of escalation, but the underlying risk remains," said Omar Tariq, energy analyst at Edgen. "The market is pricing a ceasefire that hasn't been signed yet."

WTI had traded near $85 a barrel before the decline, down from a year-to-date high above $113 reached in the weeks after the conflict began Feb. 28. Brent crude, the global benchmark, had surged above $87 before settling back near $85. The drop marked the steepest single-session decline since the fragile peace agreement collapsed in late June.

The question for traders is whether this is the start of a sustained unwind or a temporary reprieve. The Strait of Hormuz remains dangerous for commercial shipping, with tanker crossings averaging just 10 per day in July, down from about 50 before the conflict, according to Kpler vessel-tracking data. Combined US commercial and Strategic Petroleum Reserve inventories have fallen to roughly 726 million barrels, the lowest in about four decades, leaving the system with a thin buffer if hostilities resume.

Hormuz Remains the Flashpoint

The US-Iran conflict has disrupted oil flows through the Strait of Hormuz since late February, when Washington and Israel launched airstrikes against Iran. About 20 percent of the world's oil and refined products normally transit the waterway, which connects Persian Gulf producers including Saudi Arabia, Kuwait, Iraq and the UAE to global markets.

Tanker crossings have collapsed from about 50 per day before the conflict to single digits in recent weeks, according to Kpler. The International Maritime Organization warned in late June that it was too dangerous to cross the strait, and visible transit has fallen sharply as Iran continues targeting tankers attempting to pass through. The UK navy reported that Iran struck two vessels around the strait earlier this month.

Supply Risks Extend Beyond the Gulf

The supply picture is further complicated by Ukrainian drone strikes on Russian energy infrastructure. Russian crude production fell to 8.928 million barrels per day in June, the lowest in two and a half years, according to OPEC data. Russian crude-processing rates averaged 3.91 million barrels per day in the first 10 days of July, the lowest in 21 years, as Ukrainian forces have attacked Russian fuel-producing facilities more than 50 times this year, hitting at least 24 of the country's 34 largest refineries.

The attacks have deepened a nationwide gasoline shortage, with the government banning almost all gasoline, jet fuel and diesel exports. Russia is the world's number two diesel exporter after the US, according to Vortexa.

The supply constraints have already pushed pump prices higher. The national average for regular gasoline rose 16 cents to $4.02 a gallon last week, according to AAA, as crude's rally translated into higher costs for drivers during the peak summer driving season.

What Happens Next

President Donald Trump said the US has "no interest" in meeting with Iran until they are ready for serious peace negotiations. The US is sending more warplanes to the Middle East, including F-35 and F-16 fighter jets, a possible sign that military operations could expand. Houthi rebels have also threatened to impose a maritime blockade on Saudi Arabia, threatening crude exports through the Red Sea.

If the pause holds and diplomatic channels reopen, crude prices could continue to retreat toward pre-conflict levels. WTI traded at $67 a barrel on Feb. 27, the day before the conflict began. But if hostilities resume, the market has far less inventory cushion to absorb the shock than it did in February.

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