Oil prices jumped more than 2% on Monday, with Brent crude futures gaining $2.11 (2.40%) to $90.20 a barrel and US West Texas Intermediate (WTI) crude rising $1.89 (2.27%) to $85.30 a barrel. This surge was triggered by renewed military strikes between the United States and Iran, ending a period of relative calm in the six-month conflict. The US forces struck two Iranian rocket launchers on Larak Island, and Iran responded with missile and drone attacks on two air bases in Jordan, along with a report of a supertanker hitting sea mines in the Strait of Hormuz. This escalation immediately revived fears of supply risks in the Strait of Hormuz, which normally handles about 20% of the world’s seaborne oil.
The geopolitical tensions are the primary driver, outweighing some bearish factors from the previous week. The Strait of Hormuz remains a critical chokepoint, and even with some recovery in Gulf exports to 15-16 million barrels per day (still 7-8 million barrels per day below pre-war levels), any new disruption quickly tightens the market. The latest exchange of strikes and a confirmed mine incident on a tanker have revived the geopolitical risk premium. Visible commodity vessel traffic through the waterway dropped to about five ships per day over the weekend, reflecting heightened caution among operators.
Analysts are adjusting their forecasts in response to the escalating situation. JPMorgan estimates that each additional month of disruption could add $7-$8 a barrel to Brent prices, potentially leading to an average monthly Brent price of $114 a barrel if the disruption lasts three months. Goldman Sachs has warned that Brent could reach $120 a barrel if shipping problems through Hormuz persist, although its base case assumes tensions ease, with Brent averaging $80 a barrel in the fourth quarter and $75 next year. Other institutions like ING project $105-$120 in prolonged disruption scenarios, with base cases clustering around $80-$90 if diplomatic solutions emerge.
The US Strategic Petroleum Reserve (SPR) is also a factor, currently holding about 289.7 million barrels, its lowest level since 1982. This leaves the US with less flexibility to respond to prolonged supply disruptions. Furthermore, global refining constraints are contributing to tightness in gasoline and diesel markets, with US refinery utilization at 97.4%, an eight-year high. Goldman Sachs Research has increased its forecast for US and European diesel margins against Brent for 2027 to $63 a barrel and $49 a barrel, respectively, up from previous forecasts of $27 a barrel and $19 a barrel.
Despite high US crude production and potential additional Venezuelan supply offering a longer-term positive outlook, the immediate focus for crude and refined product prices remains on developments in the Strait of Hormuz. The market is now pricing in a higher probability that the recent exchange of attacks will not be an isolated incident, leading to continued volatility as the US-Iran conflict enters its seventh month.
