Uncertainty naturally prevailed last week, simply because there are two conflicts taking place simultaneously close to, or in, oil-producing and refining regions, with ambiguous outcomes and with all the unintended, or, in fact, intended, consequences for the global economy. One need not be an expert in the field to conclude that, without these hostilities, oil prices would be lower. The tricky question is whether they have already begun to affect global oil consumption adversely and, if so, whether demand destruction exceeds the disruption to oil supply, production and exports.

The view here is that they have not yet. Oil prices rallied last week as peace talks in the Middle East stalled, Hormuz traffic failed to pick up, tensions continued to simmer in the Red Sea, Ukraine’s attacks on Russian energy infrastructure remained devastating and, on a transitory basis, the recent heatwave and wildfires, particularly in Europe, resulted in lower refinery utilisation. Then again, perhaps not much should be read into the $5/bbl rally in Brent or the $16/bbl equivalent increase in Heating Oil. After all, the oil sector has proven its admirable flexibility and adaptability time and time again. In hindsight, it is no surprise that, after the initial Iran shock, prices have not gone anywhere near the peaks reached in March or April.

Our market is not trending. There is absolutely nothing that would aid in establishing a medium-term view. In the absence of clarity, it is doing the next best thing: reacting to headlines and social media posts. Yet, there were four developments last week which, if extrapolated over the next 2–3 months, strongly imply substantially limited downside and an upside bias in oil. Of course, the view expressed below comes with the unavoidable caveat of the timing of the resumption of oil flows out of the Middle East.
 

The Score: Supply 3 – 1 Demand

OECD oil inventories: while oil prices are not trending, global and OECD oil stocks, both commercial and emergency, are; the direction of travel is south. In the latest monthly roundup, all three reports from the EIA, the IEA and OPEC recorded daily global stock draws for the first two quarters of 2026 (with the exception of the EIA’s 1Q estimate). OECD industrial stockpiles, nonetheless, unanimously declined from the end of 2025 through the first and second quarters of this year. Preliminary data suggests that there might have been some consolidation, or perhaps even a slight uptick, in global and OECD inventory levels in July. After all, an agreement was struck in mid-June to open the Strait, but it had the lifespan of a mayfly. Further drawdowns are therefore pencilled in for the rest of the year.
         
The point is that, notwithstanding the mandatory rhetoric, the volume of oil leaving the Persian Gulf remains severely constrained. Despite successful mitigating factors, there has been a meaningful supply deficit over the past six months, which, according to the current snapshot, is expected to continue.
       
Lost cause: which leads us to the second point. Several signs suggest that the outcome of the conflict is out of the US's hands; the administration is tacitly, and increasingly, panicking; another discernible trend. Why else would the US President, jokingly or not, float the idea of declaring the Strait of Hormuz, after Canada and Greenland, a US territory? Or why would President Trump urge the nation to accept higher petrol prices and make a sacrifice for the greater good, namely, to prevent ‘a very evil country’ from obtaining nuclear weapons? Americans vote with their wallets, and the economic hardship imposed on them by an unauthorised war is flatly unacceptable and intolerable. So, what does growing domestic discontent have to do with oil prices? As the US Administration has trapped itself in this conflict, it will not back out easily, and de-escalation on its part is much less plausible than the opposite.
  
The Iranian approach: many rightly believe that the world could happily do without a repressive autocracy. However, dealing with it militarily has proven to be an enormous error of judgement, and the Iranians know it. The Strait of Hormuz has turned out to be a more potent weapon for the hard-line regime than its nuclear arsenal. There are several preconditions attached to the reopening of the waterway, such as unfreezing Iranian funds, lifting the naval blockade or an Israeli withdrawal from Palestine.
 
The proposed toll on tankers sticks out, and it is well worth making a quick calculation of what it might bring in for the Iranian regime. There is no concrete proposal on the table; the latest reported scheme pitches a charge of 5%–7% of the cargo value. Assume a crude price of $80/bbl and a ship carrying 2 million bbl, and Iran ends up cashing in $8 million. At 20 mbpd, the Strait’s full capacity, that would amount to $80 million per day, or $30 billion annualised. This rudimentary estimation only includes oil cargoes. For comparison, it is roughly the same as the country’s 2025 oil export revenues, as reported by the EIA, though the figure is probably on the low side because it does not account for opaque channels. In any case, political leverage would be turned into an economic lifeline, something that would probably be a nonstarter to the US and regional oil exporters; another reason why the Strait might remain shut, at least partially.

US inflation: elevated energy prices lead to high inflation, which forces central banks to raise interest rates, impeding economic and oil demand growth. The latest figures showed US consumer prices rising less quickly than before as energy prices fell in the second half of June, after the memorandum was signed. Yet, the outlook is not sanguine. Consumer sentiment is trending downwards, and inflation is likely to gain traction again. The jury is still out on whether the Fed will opt for a rate rise this year. Rising prices and interest rates are detrimental to economic prosperity; however, stuttering growth will probably be less damaging than supply disruption for the foreseeable future, as far as the oil balance is concerned. Promises and pledges to permanently reopen the Strait ought to be taken with a tablespoon of salt, and oil inventories will probably keep declining for the time being.

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