Oil markets brace for prolonged Hormuz disruption as diplomacy stalls
Crude prices stabilize near $90 as markets digest a prolonged Hormuz crisis, opaque supply flows, and shrinking fuel inventories.
Nearly six months after the outbreak of US-Iran hostilities, the oil market has shifted its focus from a quick resolution to a prolonged period of disruption in the Strait of Hormuz. The interim ceasefire agreed in June has effectively collapsed, and with the 60-day negotiating window expired, neither side appears willing to compromise. Tehran has warned of a "timely and precise" attack to break the naval blockade if diplomacy fails, while Washington insists it is moving closer to defeating Iran.
This stalemate has forced traders to accept that restrictions on shipping through the world's most critical oil chokepoint could persist for months. Consequently, crude prices have stabilized around $90 a barrel, having surrendered some of the initial panic premium but remaining roughly 50% higher than at the start of the year. The market is no longer bracing for an immediate supply collapse, but it has also abandoned hopes of a swift return to normalcy.
The economic strain is mounting on both sides. Iran's inflation has exceeded 80% year-on-year, and its crude exports have plummeted to 294,000 barrels per day (bpd) this month from 1.7 million bpd in 2025. The US is also feeling the pinch, with average gasoline prices at $4.06 per gallon, up 29% from a year ago, a politically uncomfortable position for an administration facing congressional elections.
The scale of the disruption is significant. Flows through Hormuz, which averaged about 18 million bpd before the war, fell to 4.8 million bpd in July and have averaged around 2 million bpd so far in August. While some volumes have been redirected via the UAE's Fujairah terminal and Saudi Arabia's Red Sea coast, these routes are themselves threatened by Houthi blockades at the Bab el-Mandeb Strait. Middle East exports this month are less than half of 2025 levels.
A key complication is the rise of "dark tankers" that disable tracking systems, particularly from the UAE, which has built a network to shuttle crude through Hormuz and transfer cargoes in the Gulf of Oman. This has made actual supply levels one of the market's biggest unknowns, as traders know volumes are disrupted but cannot determine by how much.
Beyond crude, refined fuel markets are exceptionally tight. Global refinery throughput in July was nearly 5 million bpd below year-earlier levels, reflecting lost capacity in the Middle East and damage to Russian facilities. While US refineries have run at record rates to offset the shortfall, seasonal maintenance and hurricane threats could soon curb that support. Global observed oil stocks saw their largest quarterly draw in at least a decade, with US diesel inventories at three-decade lows for this time of year.
Freight markets reinforce the picture of a structural shift. Rates for very large crude carriers from the Middle East to China have surged to $490,000 per day, nearly ten times higher than at the start of the year, reflecting shipowners' reluctance to enter conflict zones and the need for longer-haul voyages from suppliers like the US and Brazil.
As the impasse drags on, the market is adapting to a world of opaque supply flows, shrinking inventories, and strained refining capacity. With no credible diplomatic path in sight, this growing realization—rather than battlefield developments—may keep oil prices elevated well into next year.