Oil prices remain below recent highs despite fading hopes for a quick reopening of the Strait of Hormuz, a situation analysts warn may become increasingly difficult for markets to ignore.
Brent crude futures ended last week more than 7% lower after signals from Washington suggested that an agreement with Tehran to reopen the key shipping route could be approaching. However, no agreement has been reached, and prospects for a deal appeared to weaken over the weekend.
Iran has insisted that the United States must meet several conditions before the strait can reopen, while U.S. President Donald Trump has indicated that Washington may focus on increasing economic pressure on Tehran rather than pursuing immediate military action.
Brent crude was trading near $88 per barrel in early Tuesday trading, up from around $83 at the end of the previous week. Despite the recovery, prices remain below last month’s move above $100 per barrel and the peak above $110 recorded in May.
Oil markets weigh Hormuz reopening risks
Energy markets have received some support from expectations that discussions between Iran and Oman over a temporary shipping route through the Strait of Hormuz could continue. Traders have also taken comfort from hopes that further military escalation between the U.S. and Iran can be avoided.
Modupe Adegbembo, an economist at Jefferies, said investors remain confident that some form of agreement could eventually allow more oil and goods to move through the strait, even if the outcome is not a comprehensive deal.
However, she warned that this confidence may be temporary. If the current situation continues without progress, oil prices may face renewed upward pressure as markets adjust to the possibility of a prolonged disruption.
Kieran Tompkins, senior climate and commodities economist at Capital Economics, said current oil prices reflect a balance between two competing expectations: a quick return of energy flows and an extended closure of the Strait of Hormuz.
If the deadlock continues, traders may begin pricing in a higher probability of a longer disruption. This could push front-month oil futures higher, particularly if concerns grow around the market reaching a supply “tipping point.”
Supply concerns could push oil higher
Analysts warned that if the strait remains closed and inventories in developed economies continue declining, oil markets could face a significant supply challenge by the beginning of the fourth quarter.
In that scenario, prices could rise substantially, potentially reaching the $120 to $140 per barrel range based on previous market reactions to major supply disruptions.
Markets have so far been supported by alternative export routes, weaker demand, increased production and lower Chinese oil imports. However, analysts questioned how long these factors can continue offsetting supply pressures.
Amrita Sen, founder and director of research at Energy Aspects, said China played a major role in balancing the market earlier in the year by reducing crude imports. With Chinese oil demand recovering and imports expected to increase, she warned that lower oil prices may not be sustainable.
Markets have recently been quick to price in the possibility of normalized shipping conditions whenever there are signs of progress in negotiations. However, physical supply constraints remain, including continued attacks affecting energy infrastructure in the region.
According to Sen, the underlying fundamentals of the crude oil market remain increasingly supportive of higher prices as uncertainty surrounding the Strait of Hormuz continues.
