Analysis: Can crude oil prices rally more as Israel-Iran war escalates?

Business Standard

3 hours ago

Strait of Hormuz in focus: Crude oil faces volatility from Iran-Israel escalation
Crude oil price outlook: Crude oil prices have been buoyed by escalating tensions in West Asia, particularly following Iran's Supreme Leader's declaration rejecting US President Donald Trump's call for unconditional surrender. This geopolitical standoff, coupled with a sharp drawdown in US inventories, has kept prices elevated. WTI crude surged from $65 on June 10 to $75 by June 16, driven by Israel's military strikes on Iran and fears of disruption to the Strait of Hormuz—a vital artery for global energy trade.
The strait handles nearly 20 per cent of seaborne oil and a quarter of LNG exports, making it a key pressure point in the conflict. Despite a brief pullback, oil remains up 7 per cent year-to-date, 20 per cent over the past month, and 10 per cent in the last five trading sessions. The potential for US involvement has further intensified market concerns, reinforcing the risk premium embedded in current prices.
How will Iran-Israel conflict affect oil prices?
Iran's strategic control over the Strait of Hormuz places global energy flows at risk, with approximately 17 million barrels of oil and significant LNG volumes passing through daily. The strait is essential for exports from Gulf nations including Kuwait, Iraq, Bahrain, and Saudi Arabia, while Qatar, Oman, and the UAE rely on it for LNG shipments. Although both Iran and Israel have, so far, refrained from targeting energy infrastructure directly, any attempt to obstruct this route could send oil prices soaring past $100 per barrel.
Historically, the strait has remained open even during intense conflicts like the 1984 Tanker War, but recent Iranian actions—such as vessel seizures and support for proxy attacks—suggest a growing willingness to leverage maritime control. While a full blockade remains improbable, partial disruptions could be used to provoke international intervention and shift diplomatic dynamics.
De-escalation, negotiation, and sanction prospects
Diplomatic efforts are underway to de-escalate the Iran-Israel conflict, though Iran's weakened position complicates negotiations. Its traditional proxies—Hamas, Hezbollah, and the Houthis -- have been largely neutralized since late 2024, reducing Tehran's regional influence. Sanctions targeting Iran's oil exports are expected to tighten, but enforcement remains a challenge, especially with China continuing to import roughly half of Iran's 1.5–1.6 million barrels per day. Previous sanctions on Iran, Russia, and Venezuela have shown limited effectiveness without broad international compliance. The key question is whether the US can persuade major buyers to reduce their reliance on Iranian crude without destabilising global supply.
Global crude oil market scenario
Beyond geopolitical risks, structural shifts in global oil demand are emerging. China's crude imports fell 3 per cent month-on-month in May, reflecting the impact of trade tensions and slowing economic activity. Indian demand has remained flat, offering little support to global consumption. On the supply side, Opec+ has resumed 1.38 million barrels per day of production from previously stored volumes, contributing to a surplus of 0.6–0.7 million barrels per day by the end of May. While the group remains optimistic about demand recovery in 2025–26, growth from non-OPEC producers like the US and Canada may decelerate, potentially balancing the market over time.
US weekly crude inventories
The latest data from the EIA indicates a substantial inventory drawdown of 11.47 million barrels, bringing stockpiles 10 per cent below their five-year average. Distillate inventories are even more depleted, sitting 16.7 per cent below seasonal norms. Despite these declines, US production remains steady at 13.43 million barrels per day, suggesting resilience in domestic output even as demand indicators soften.
FOMC economic projection
The Federal Reserve continues to maintain a hawkish stance, keeping the federal funds rate within the 4.25 per cent to 4.50 per cent range. Policymakers noted solid economic activity and a robust labor market, though inflation remains elevated. The Summary of Economic Projections (SOEP) shows a downward revision in GDP forecasts—1.4 per cent for 2025 and 1.6 per cent for 2026—while the long-run rate holds at 1.8 per cent. Unemployment projections have been raised slightly, and core PCE inflation expectations have increased to 3.1 per cent for 2025 and 2.4 per cent for 2026, reflecting persistent price pressures.
Oil price outlook
In the near term, crude oil prices are likely to remain supported by geopolitical uncertainty and tightening inventories. However, the broader outlook is less bullish. Global supply continues to outpace demand by 0.5–0.6 million barrels per day, with projections suggesting a surplus of up to 1 million barrels daily by the end of 2025. Unless demand rebounds or supply is curtailed, this imbalance could exert sustained downward pressure on prices, even as short-term risks keep volatility elevated. once the conflict find a diplomatic resolution we expect WTI prices to moderate towards $67 level.