Week in Review – Oil Markets Stay on Edge as Middle East Tensions Intensify

Oil prices remain elevated after a volatile week as expanding conflict in the Middle East threatens the movement of energy supplies through the Strait of Hormuz and the Red Sea. Houthi attacks on Saudi oil tankers and the possibility of further U.S. military action against Iran have intensified concerns about prolonged shipping disruptions, keeping WTI on track to finish the week approximately $8 per barrel higher.

The latest price movement follows attacks by Iran-backed Houthi forces on two Saudi Arabian oil tankers in the Red Sea. The attacks pushed oil prices approximately 7% higher on Thursday and raised new concerns about the security of the Bab el-Mandeb strait, the gateway connecting the Red Sea to the Gulf of Aden. This route has become increasingly important as Saudi Arabia diverts oil by pipeline toward the Red Sea to avoid disruptions in the Strait of Hormuz.

Ships are still moving through the Red Sea, but the risks and costs associated with those journeys are increasing. A Greek tanker carrying Saudi Arabian crude reportedly exited the Red Sea overnight with its transponder switched off, while Chinese and Russian vessels continued toward the Bab el-Mandeb strait. Several other tankers turned around and headed north through the Suez Canal, potentially requiring them to take a longer and more expensive route around Africa to reach Asian markets. Shipping insurance costs through the southern Red Sea also doubled for some companies following the attacks.

Activity through the Strait of Hormuz remains even more limited. Preliminary ship-tracking data showed only three daily vessel transits through the strait during each of the past three days, while the number of tanker crossings fell to just one on Thursday, the lowest level since May 7. Although these routes are not completely blocked, reduced traffic and the possibility of further attacks are making it more difficult and expensive to move crude oil and refined products through the region.

Military escalation is adding another layer of uncertainty. President Donald Trump said he is considering a "massive attack" on Iran in an effort to force a peace agreement and promised additional military punishment following the Houthis' attacks. U.S. missiles struck targets across Iran on Friday morning, including locations near the Caspian coast, while Iran responded by firing at U.S. positions in Kuwait, Bahrain, Jordan, and Iraq. The renewed conflict comes two weeks after an interim truce collapsed.

Diplomatic efforts are continuing, but major obstacles remain. Pakistan is exploring a possible path toward restarting U.S.-Iran negotiations following an initiative supported by China. However, Pakistani officials indicated that attacks on Saudi Arabia and other Gulf countries would need to stop before negotiations could resume. China has a significant interest in restoring stability because disruptions in both the Strait of Hormuz and the Red Sea affect trade routes and energy supplies that are important to its economy.

The growing supply risk is already changing crude purchasing behavior. Chinese buyers are purchasing Russia's ESPO crude earlier than usual as they seek to secure supplies amid concerns about Middle Eastern shipping disruptions. Analysts have also warned that prolonged supply interruptions could continue pushing prices higher. JPMorgan estimated that each additional month of disruption could add approximately $7 to $8 per barrel to Brent prices, potentially lifting the monthly average to around $114 per barrel if disruptions continue for three months.

Russia is creating additional concerns for global fuel markets. Ukrainian strikes on Russian refineries have contributed to domestic fuel shortages and rationing, while the country's crude-processing rate fell to a multi-year low of approximately 3.5 million barrels per day in July. Russia is now considering extending its diesel-export ban for another month and its gasoline-export ban for six months. Any prolonged restrictions could tighten international supplies of diesel and gasoline at a time when markets are already managing reduced refinery output and uncertain shipping flows.

Kazakhstan has also temporarily reduced oil production after suspected Ukrainian drone attacks forced the closure of its main Black Sea export terminal. At the same time, Russia said its forces struck three Ukrainian ports, targeting loading and unloading facilities and fuel reserves. Together, these developments are expanding supply concerns beyond the Middle East and placing additional pressure on the global energy transportation system.

Broader economic conditions are also influencing the outlook. The United States has imposed new tariffs ranging from 10% to 12.5% on imports from most major trading partners. Tariffs can create additional inflationary pressure and increase costs throughout global supply chains. Initial U.S. unemployment claims, however, declined to 187,000 during the week ending July 18, their lowest level since 1969, suggesting that the labor market remains resilient.

For now, Friday's price decline appears to be a retreat from Thursday's surge rather than a sign that supply concerns have disappeared. Oil continues to trade at elevated levels because the market is balancing active military conflict, restricted shipping activity, refinery disruptions, potential fuel-export bans and uncertain diplomatic negotiations. As long as the Strait of Hormuz and the Red Sea remain under pressure, energy prices are likely to stay highly sensitive to every new military, shipping and diplomatic development.

Prices in Review

Crude prices moved steadily higher over the course of the week. Prices opened at $83.76 on Monday and edged down slightly to $83.48 on Tuesday. The prices then turned higher, rising to $84.69 on Wednesday, $87.72 on Thursday, and $92.55 on Friday, the highest level of the week. Overall, crude prices increased by $8.79 per barrel, representing an approximate 10.5% gain during the week.

Diesel

Diesel prices opened at $4.1069 on Monday and edged up to $4.1242 on Tuesday, then rose modestly to $4.1444 on Wednesday and $4.1799 on Thursday. Prices strengthened further on Friday, reaching $4.3787. Overall, diesel prices increased by $0.2718 per gallon, representing an approximate 6.6% gain during the week.

Gasoline

Gasoline prices remained relatively stable through midweek before moving higher to end the week. Prices opened at $3.4200 on Monday and eased slightly to $3.4022 on Tuesday, then fell further to $3.3998 on Wednesday. Prices then turned higher, rising to $3.4300 on Thursday and $3.4930 on Friday. Overall, gasoline prices increased by $0.0730 per gallon, representing an approximate 2.1% gain during the week.