continue to rise for the second consecutive day, by more than 4% for both and , trading above the levels of 87 and 94 dollars per barrel, respectively. The rise in comes amid the dissipation of the main assumption that substantially helped keep prices low: that the war could not last long. While markets have long tried to cling to that assumption, today we see many signs that contradict it.
After 11 days of continuous strikes on Iran, there is no signal indicating that we are on the path to returning to negotiations. The United States is moving toward intensifying strikes on Iran in an effort to push it to give up imposing its dominance over the Strait of Hormuz. Meanwhile, the leadership in Iran does not seem enthusiastic about making a concession in this regard, according to officials who spoke to Bloomberg. Furthermore, the killing of several American soldiers as a result of Iranian strikes represents a crossing of one of the most critical red lines for the United States, making a quick return to negotiations, even if on American terms, impossible without achieving broad military retaliation. Additionally, those missile attacks, especially on Muwaffaq Salti Air Base in Jordan, highlight Iran’s missile and drone capabilities despite the extensive strikes launched so far, as reported by The Wall Street Journal.
Not only that, but it seems that the dissatisfaction of Gulf states with ongoing Iranian attacks against them has made them more inclined to favor escalation, with informed sources telling Bloomberg that some officials believe Washington should escalate military action against Iran, and even deploy troops on the ground to take control of Kharg Island.
In addition to all this, the naval blockade announced by the Houthis in Yemen against Saudi Arabia will further obstruct oil flows from the region, which were helping to relieve some of the sharp supply shortage. This brings back memories of 2019, when the Houthis managed to cut half of the Kingdom’s production in a single day when targeting facilities.
Prolonging this war carries the risk of deepening damage to oil supplies flowing from the region, not only by obstructing tanker movements but also by targeting infrastructure responsible for extracting and exporting crude and , whether in Iran or in the Gulf states. This damage would be structural and might not be repairable for years, keeping a chronic supply shortage in place. This has actually happened on several occasions, and it is not imaginary.
Not only that, but the war is likely to reveal the true extent of the global energy market’s fragility. An analytical article in Foreign Policy argued that the oil market is much more fragile than Trump imagines, having learned the wrong lesson because crude prices did not reach the peaks analysts warned about. Ali Ahmadi, an executive fellow at the Geneva Center for Security Policy, noted in his article for the magazine that the relative stability of prices during the first half of this year was due to reserve stockpiles accumulated over decades, production surpluses, and consumer tolerance, adding that these factors have now substantially dissipated. Ahmadi also believes that the current round of escalation and the reopening of the Straits of Hormuz and Bab el-Mandeb threaten to raise prices at a faster pace than in previous rounds.
Furthermore, Ahmadi outlines expert viewpoints highlighting concerns over whether infrastructure can handle the pressure resulting from the rapid rate of withdrawals from US strategic stockpiles. He also draws on warnings issued by JPMorgan regarding the potential for global crude oil inventories to reach critically low levels in September, with nearly a third of usable reserves consumed by late last April, when inventories stood at only about 800 million barrels out of 8.4 billion barrels of total stockpiles before the war. Finally, Ahmadi sees that Trump is risking the political cost of rising , which could directly impact the outcome of the midterm elections, posing a threat to the primary assumptions traders cling to when betting on a return to falling prices.
I conclude by saying that betting the war cannot last long is a losing bet, unless we see a comprehensive, solid agreement with detailed wording on managing the Strait of Hormuz first and the nuclear agreement second. Without such an agreement, the risks of escalation and of the conflict spiraling out of control remain, threatening to exacerbate structural and chronic damage to global supplies. We might see a sudden announcement from Trump about a return to negotiations, which could be followed by a drop in oil prices, but I believe this will be temporary unless we see an agreement that meets the specifications we discussed.
