Oil prices rise due to escalating tensions between the US and Iran and supply concerns

The international Brent crude benchmark rose to $84.84 per barrel on Wednesday afternoon, an 11.6% increase from $76.01 on Sunday. Sarah Rafoul, Senior Analyst at Argus Media, stated that the market underestimated the vulnerability of global oil reserves to disruptions in the region. She emphasized that the brief optimism that drove oil market movement toward contango has vanished due to the resumption of hostile actions between the US and Iran, exposing the dependence of global supply chains on the Strait of Hormuz and sharply increasing crude oil prices.

Supply Threats and Constraints

Rafoul warned that the current crisis is unfolding in a much tighter market than previous disruptions. She noted that the second crisis in Hormuz occurs against a backdrop of significantly lower reserves, with OECD oil stocks approaching multi-year lows, and Asian governments planning a massive expansion of strategic reserves, which could add hundreds of millions of barrels of demand over the next 12–18 months.

The Strait of Hormuz is one of the world's most strategically important maritime corridors, through which a significant portion of global trade in crude oil and petroleum products passes. Any disruption to traffic in this waterway immediately affects international energy prices. Rafoul also reported that the refined product markets are facing even greater pressure than the crude oil market, as product flows through the strait have been more restricted than crude oil exports.

Pressure on Diesel and Gasoline

Simultaneously, drone attacks by Ukraine on Russian refineries and Moscow's ban on diesel fuel exports are reducing supply in a market where diesel stocks in Europe and the US are already significantly below seasonal norms. The tightening of the diesel market is expected to have broader economic consequences, especially for industries heavily reliant on freight transport, mining, and agriculture.

Despite less direct exposure to Persian Gulf disruptions, gasoline prices are also rising. According to Rafoul, strong seasonal demand is meeting limited refinery production. Refiners are prioritizing the production of higher-margin diesel and aviation fuel, causing gasoline balances to become increasingly strained.

Shifts in Trade Flows

These changing trends are also transforming global fuel trading schemes. Rafoul pointed out that the US is replacing Russia as the main supplier of diesel fuel to Brazil, and refiners are increasingly rerouting barrels around Europe in response to higher margins in other regions. China may also become an increasingly important factor in determining oil prices in the coming months.

In Rafoul's view, recent changes in Beijing's policy could increase demand for crude oil after a period of import weakness. Easing restrictions on the export of gasoline, diesel, and aviation fuel could trigger a recovery in crude oil imports following a sharp decline earlier this year. However, she cautioned that renewed instability in the Middle East could undermine the recovery of Chinese exports, prompting Beijing to prioritize domestic supply security over export growth.

Forecasts and Market Reaction

Looking ahead, Rafoul believes that the combination of geopolitical instability, historically low reserves, and recovering demand will support high oil prices. She forecasts that the mix of geopolitical risks, low stocks, growing crude oil demand in China, and product supply issues will likely keep crude oil prices and refining profitability supported through 2026 and into 2027. This means businesses and consumers may continue to face higher fuel costs, while central banks closely monitor the inflationary impact of rising energy prices on the global economy.

Meanwhile, amid ongoing instability in the Middle East, global markets are showing a noticeable shift in sentiment following the release of the latest US Consumer Price Index (CPI) data. Bianca Botes, Managing Director of Citadel Global, reported that the CPI was 3.5%, which was lower than expected for June, leading to a re-evaluation of interest rate hike expectations and giving investors a glimmer of hope amidst continued turbulence.

Botes noted that the positive investor reaction reflects growing complacency as expectations for future monetary policy adjust in light of recent economic indicators. In Asia, positive trends continued: Japan's Nikkei 225 rose by 1%, and the Korean Composite Stock Market Index jumped by an impressive 7%, demonstrating the resilience of these markets amid geopolitical turmoil. Botes added that Brent crude remains closely tied to events in the Middle East, as it traded at $84.98 per barrel on Wednesday. Meanwhile, US President Donald Trump confirmed that military actions would continue until a satisfactory deal was reached in the region.

However, gold prices failed to hold their ground, aided by the CPI report, and fell by 0.5% on Wednesday morning, settling at $4030 per ounce. Botes suggested that investors are reassessing their gold holdings as the expected decrease in inflationary pressure begins to change market dynamics. An additional factor was the news of robust economic data from China, indicating economic stabilization. The South African Rand showed resilience, trading in a range and strengthening back to 16.38 South African Rand against the US dollar following softer CPI data.