Oil Prices Await a «Strait of Hormuz Breakthrough»

Oil prices continued their losses during yesterday’s (Thursday) trading, as market hopes grew that ongoing diplomatic moves would lead to the reopening of the Strait of Hormuz and ease supply disruptions caused by the ongoing Middle East conflict, which has persisted for about six months. Brent crude futures fell 0.5%, or 41 cents, to $87.43 a barrel, heading for a fourth consecutive session of losses, while US West Texas Intermediate crude declined 0.5%, or 37 cents, to $81.86 a barrel, on track for a fifth straight session of declines. The price drop followed comments from a senior Iranian source on Wednesday stating that Iran and the Sultanate of Oman are finalizing an agreement to manage the Strait of Hormuz, with attention focused on diplomatic efforts to de-escalate the conflict and restore navigation through one of the world’s most critical energy trade arteries.

The significance of any breakthrough lies in the fact that, before the outbreak of the US-Israel-Iran war on February 28, the Strait of Hormuz served as a transit route for oil and natural gas equivalent to roughly one-fifth of global fuel consumption. Ship-tracking data shows that oil flows through the strait have fallen to about a quarter of their pre-war levels following disruptions in the waterway.

Daniel Hynes, chief commodities strategist at ANZ, said crude prices declined as the likelihood of reopening the strait improved amid ongoing talks, but he warned that supply shortage concerns remain. Despite the optimism that has weighed on prices, markets are still retaining a portion of the “war premium,” given continued disagreements over the terms for ending the conflict and the lack of a settlement that would ensure the normal and sustainable resumption of navigation.

Pressure on crude supplies is not the only factor; the Middle East conflict and Ukrainian attacks on Russian refineries have also impacted the global diesel market, with refining capacity damaged and some Russian exports declining. Data from the US Energy Information Administration showed that distillate inventories, which include diesel and heating oil, fell by 2.2 million barrels in the week ending August 21, to 103.4 million barrels. ANZ noted that inventories have dropped to their lowest level for this time of year.