The June reopening of the Strait has collapsed amid renewed Hormuz disruption, military strikes and opposing blockades from the US and Iran. While the Strait is not hermetically sealed, allowing for limited, often hidden ship-to-ship transfers, it is functionally closed to standard commercial shipping.
Geopolitical and military risks are escalating rapidly. The US has reinstated its blockade and launched strikes on Iranian targets, while Iran has retaliated against commercial shipping and threatened to disrupt the Bab el-Mandeb strait in the Red Sea.
This near-closure and renewed Hormuz disruption has fractured the oil market. Brent is rebuilding a geopolitical premium, but the most acute physical scarcity is in middle distillates (diesel and jet fuel). However if Asian gasoline demand recovers, this market could easily become tight as well.
The June reopening of the Strait and the brief surge in exports was an illusion of recovery – it was merely an evacuation of stranded inventory, not a return to sustainable supply. A functioning supply chain requires a continuous cycle of inbound empty tankers to lift new crude. Without them, regional onshore storage quickly fills, severely constraining the restart of the ~11 mb/d of shut-in Gulf production. Consequently, reported Gulf production currently vastly overstates true global availability.
Ultimately, a total military blockade is not required to paralyse the market. War-risk insurance premiums are surging toward 3–5% (adding upwards of $1.5/bbl in costs), and the International Maritime Organization has advised avoiding the Strait. This is triggering an effective private-sector closure – if owners, crews and insurers refuse the safety risks of entering the Gulf, Hormuz remains closed to the market regardless of the legal or military reality.
Crude has repriced for renewed Hormuz disruption, but not for a total loss of Gulf supply
NYMEX August WTI settled at $79.3/bbl on 14 July, while September Brent settled at $84.7/bbl. Brent subsequently traded around $85–86/bbl on 15 July, up by roughly 12% from its 10 July settlement.
The curve has moved even more dramatically. First-month Brent traded at an $8.9/bbl premium to the sixth-month contract, reversing the contango seen in early July. Oman, Dubai and Murban also moved from discounts into premiums. This indicates that the market is again pricing scarcity of reliably deliverable prompt crude.
The reversal is justified. The earlier fall towards $72/bbl assumed that rising outbound flows would lead to a relatively smooth production recovery. That assumption now looks too optimistic. The resumption of the US blockade threatens Iranian exports, while the decline in non-Iranian tanker movements raises the risk that other Gulf production will remain locked-in.
However, Brent is not yet pricing a complete and prolonged loss of all Hormuz-linked supply. Amid the renewed Hormuz disruption, some Iran-approved traffic continues, bypass pipelines remain operational, ship-to-ship transfers are supporting limited exports and additional crude is available from the Atlantic Basin and the Americas. Weak Chinese demand also reduces the size of the immediate global deficit. Most of all, the market appears to still believe there will be military de-escalation followed by tanker flows materially ramping up again.
A move towards $100/bbl becomes more likely if one of three conditions emerges:
- Non-Iranian inbound tanker traffic remains near zero for several weeks.
- Gulf terminals, pipelines, refineries or other energy infrastructure are damaged.
- Bab el-Mandeb is disrupted alongside Hormuz.
For now, if these conditions are avoided, crude is more likely to remain highly volatile than move in a straight line higher. However, time is not on the market’s side. Global inventories have already been heavily depleted.
Middle distillates remain the real physical shortage
The strongest evidence of physical scarcity is appearing in diesel rather than crude markets. US diesel for near-term delivery traded $8.3/bbl above the following month, with premium rising by 51% in one session. Buyers are paying substantial premiums for prompt fuel because they are uncertain that replacement cargoes will arrive later.
Three shocks are reinforcing each other:
- Middle Eastern refinery and product exports have not recovered as quickly as crude.
- Ukrainian attacks have reduced Russian refinery output and prompted Russia to ban diesel exports until 31 July. The ban could easily be extended if Russian refineries continue to be hit.
- The potential extension of shipping disruption to Bab el-Mandeb threatens Red Sea deliveries and raises the cost of alternative routes.
Russian seaborne diesel and gasoil exports had already fallen 39% month on month in June. During 1–8 July, exports averaged only 214 kbbl/d, compared with 793 kbbl/d in July 2025. European diesel cracks reached a record $60.2/bbl following the Russian export ban. Russia and its usual customers are now competing with Europe for replacement diesel from India, the US Gulf Coast and Northeast Asia.
Depleted inventories increase sensitivity to the renewed closure
US petroleum inventories rose by 10.3 Mbbl in the week ending 10 July, but the headline build was concentrated in distillate (+4.6 Mbbl) and propane (+3 Mbbl), while commercial crude, gasoline and the SPR all fell. Crude and gasoline stocks therefore remain below their 2022–25 seasonal averages, so the data do not yet show a broad restocking cycle. Any re-stocking is unlikely unless increased Gulf exports loosen global petroleum markets – or if the US restricts exports.
The system therefore has some prompt crude, but much less refined-product and strategic cover than before the conflict. Emergency releases prevented a more severe shortage, but also weakened the buffer available against another prolonged closure.
Global refinery runs increased by 1.5 Mbbl/d in June but remained around 6 Mbbl/d below year-earlier levels. Middle Eastern export refineries had not fully restarted, Russian throughput was constrained and Asian runs remained depressed. That explains why crude temporarily appeared abundant while product cracks continued rising.
China remains the largest counterweight to the bullish crude case. Total crude imports fell to 7.1 Mbbl/d in June (compared with a 2025 average of 11.6 Mbbl/d), and refinery utilisation fell to 57.7%.
Weak domestic fuel and petrochemical demand, poor refining margins and restrictions on refined-product exports reduced crude requirements. China’s expanding EV fleet has progressively lowered the structural growth rate and oil intensity of road-fuel demand, reducing the baseline against which the latest shock is absorbed. However, the immediate response to high prices has come mainly through lower mileage, weaker activity, reduced refinery runs and inventory drawdowns rather than rapid vehicle switching. But China also drew on inventories accumulated when prices were lower. Whilst substantial – we estimate that China accumulated roughly 300 Mbbl of crude inventory in the 14 months leading up to the war – these inventories are finite.
If flows out of Hormuz materially ramp up and crude prices fall, Chinese demand is likely to return. China will not want to deplete its inventories too much once prices have fallen. Although electrification is a medium to long-term headwind for Chinese final demand, much of the recent fall is probably a cyclical response to high prices.
Market outlook
The market is pricing an unstable coercive equilibrium. The US blockade reduces Iran’s reward for restraint: if Tehran cannot export freely, it has a strategic incentive to raise the cost of its Gulf rivals’ exports and restore bargaining leverage. Washington, meanwhile, must defend non-Iranian passage or weaken both the blockade and its security guarantee to Gulf allies. Neither side wants a full-scale war, but both must demonstrate resolve. Limited attacks and counterstrikes are therefore individually rational yet collectively escalatory, leaving the system highly exposed to miscalculation.
As crude accumulates inside the Gulf, stocks drain in consuming markets, amplifying the geopolitical and military risks. Products are more vulnerable because refinery restarts and product exports will lag any crude recovery. Russian disruption reinforces the shortage, leaving gasoil and jet fuel fundamentally tighter than crude.
A credible reopening would release stranded crude and compress Brent quickly, but middle distillates would normalise more slowly. If inbound tankers remain absent, insurance retreats, Gulf storage fills or Bab el-Mandeb is also disrupted, the shipping constraint becomes a production loss just as the inventory buffer is exhausted. The most robust view is therefore a supported and highly volatile front end, persistent gasoil and jet strength and a credible path to a nonlinear price spike if escalation crosses the next operational threshold.
