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Bousso: The ROI-Oil Market begins pricing for a prolonged Hormuz Crisis

Oil market behavior is becoming more and more like a permanent reality. It's not just a temporary shock. Hopes for a diplomatic breakthrough are fading nearly six months after the war between Iran and the U.S. erupted. The interim ceasefire that was agreed to on June 17 is now 'effectively over,' the 60-day negotiation period has ended, and neither Washington or Tehran appear willing to compromise about the future of Strait of Hormuz.

Both sides have instead dug in. Iran warned that tensions would escalate if Washington did not fully implement the interim peace agreement within a few weeks. A senior Iranian official said that if diplomacy fails, Tehran will launch a?timely and precise??attack in order to break the U.S. naval blockade. Donald Trump, the U.S. president, said that on July 7, 2017, the agreement was "over." Since then, he has insisted that Washington is moving closer to defeating Iran.

This stalemate could last for several months, forcing traders to deal with shipping restrictions through the Strait of Hormuz - the world's largest oil chokepoint.

This shift in expectations may explain why crude oil has stabilized at around $90 per barrel. The price of crude oil has lost some of its premium for panic since the beginning of the conflict. However, it is still roughly 50% higher than when the year began. Markets may not be concerned about an immediate collapse of supplies, but they do not expect a return to normality.

MOUNTING PAIN

The economic costs of both sides are increasing behind the political rhetoric. Iran is being put under increasing pressure by the conflict and U.S. Blockade. According to a report by ISNA, the inflation rate in July was over 80% compared to a year ago. Meanwhile, crude exports are down to 294,000 barrels / day from 1.7million bpd a month earlier. U.S. consumers are also paying the price. Trump warned Americans that they should prepare for high fuel costs. This was an uncomfortable admission from a president, who had campaigned for lower energy prices. He also faces congressional elections this November. According to the American Automobile Association, the average gasoline price was $4.06 per gallon, up 29% compared to a year earlier.

While diplomats are still deadlocked, oil markets continue to adapt.

SMOKE AND MIRRORS

The scale of disruptions to supply is the biggest unknown. Kpler reports that the flow of crude and refined product through Hormuz has fallen from 18 million barrels per day (bpd) before the war to just 4.8 million in July. It is now hovering around 2 million in August, despite Iranian attacks and an American blockade. This loss of?volume was partially offset by increased exports to the United Arab Emirates from Fujairah and Saudi Arabia from the Red Sea coast. Even these alternative routes are now under pressure, after Yemen's Iran-backed Houthis imposed a ban on Saudi exports via the?Bab el-Mandeb Strait at the southern entrance to the Red Sea.

According to Kpler, the Middle East exports this month averaged only 9.5 million barrels per day, which is less than half of 21 million barrels per day in 2025.

These figures could be under- or overstating actual exports, as more oil from the region is moving into shadows.

There is increasing evidence that Gulf producers rely more on vessels that disable their tracking systems when transiting Hormuz or Bab el-Mandeb. The UAE in particular appears to have developed a network of dark tankers that transport crude oil through Hormuz and then transfer cargoes into the Gulf of Oman.

It is a rare situation where traders are aware that supplies have been interrupted but can't determine the exact amount. UAE crude exports have averaged 3,38 million bpd since August. This compares to 3.2 million in 2025. These volumes may be under pressure, however, after Iran is reported to have hit several tankers associated with Abu Dhabi National Oil Company while they were traveling through Hormuz.

The biggest unknown on the market is how much oil actually reaches consumers. Energy markets will be uncertain as long as the Hormuz impasse remains unresolved.

Even if crude oil exports stabilize, other indicators indicate that high oil prices may persist.

The refined fuel market has become extremely tight. According to the International Energy Agency (IEA), global refinery output in July was almost 5 million bpd lower than the previous year, at 81,000,000 bpd. This reflects the loss of capacity for refining in the Middle East, and the damage caused to Russian facilities by Ukrainian drone attacks.

The?shortfall was offset by an increase in U.S. exports of fuel, and American refineries are running at or close to record rates. This support could soon disappear. The U.S. Gulf Coast is threatened by seasonal maintenance in preparation for winter and hurricane season.

Lower refining activities?will hamper attempts to rebuild depleted inventories. This will help sustain high prices for products and margins of refining, which are at record levels.

Inventory levels are particularly alarming. According to the IEA, Global observed that oil stocks dropped by 2.4 millions bpd during the second quarter. This was their biggest quarterly draw for at least a decade. U.S. Diesel inventories are the lowest they have been for this time in 30 years, and gasoline stocks are their lowest seasonal level since 2012.

The freight markets send a similar signal.

According to LSEG, benchmark rates for large crude carriers transporting oil to China from the Middle East have risen from $300,000 to $490,000. This is equivalent to $5 a barrel and almost 10 times more than the rate at the beginning of the year.

These rates reflect the shipowners' unwillingness to enter conflict zones, and the growing demand for oil tankers that can transport fuel and oil from distant suppliers such as Brazil and the U.S.

The longer the Hormuz impass continues, the less it looks like a temporary shock to the supply and the more this resembles structural reshapings of the global oil trade.

The markets are struggling to cope with a world of opaque flows, shrinking inventories, stretched refining capacities and no credible diplomatic pathway toward restoring the Gulf trade. This growing awareness, and not the battlefield developments, could ultimately keep oil prices high well into next.

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(source: Reuters)