Crude oil prices plunged below $70 per barrel at the beginning of the week, and energy markets largely considered the Iran war over and done with as modest traffic flowed again through the infamous Strait of Hormuz.
But nearly 1 billion barrels of worldwide petroleum reserves are now depleted and not being replenished. At the same time, mothballed refineries have yet to come back online, China still hasn’t resumed importing large oil volumes, and now President Donald Trump has declared the interim peace deal “over” amid new drone and rocket exchanges.
The reality is there’s no clear, long-term peace deal in sight, even if a full resumption of conflict is avoided. That means the Strait of Hormuz is unlikely to return to its normal volumes for many months, and certainly not in time for the anticipated spike in demand when China and refiners start buying more oil again, energy analysts told Fortune. Prices are going to surge again—likely close to $90 per barrel—despite the world learning to adapt and avoid doomsday scenarios of $200 oil, they said.
And this could represent a nightmare scenario for a Trump administration eager to move on from Iran and lower fuel prices in time for the November midterm elections.
“There’s a bill that’s coming due,” said Marshall Adkins, head of energy for Raymond James, who admitted oil prices had fallen more than he anticipated. “The market thinks, ‘Oh yeah, things are going back to normal.’ But, watching Iran for as long I have, I don’t think that’s really going to happen. That hasn’t been the modus operandi for Iran for the last 45 years.”
If he didn’t before, Trump now knows. With the U.S. trying to increase traffic closer to the Oman side of the strait, Iran opened fire on some vessels this past week. The U.S. countered. At the July 8 NATO summit in Turkey, Trump said he thinks the interim deal with Iran is “over,” and he went on to call the Iranian leadership—in alphabetical order—“cancer,” “cheats,” “cuckoo,” “evil,” “liars,” “scum,” “sick,” “vicious,” and “violent” people. In June, he said they were “very rational people” who were “nice to deal with.” What changed? “I got to known them.” It also probably didn’t help that Israel warned the U.S. of a potential Iranian threat on Trump’s life.
Trump then also said he doesn’t think a full war would resume and that “anything that happens will be over quickly.” But there doesn’t seem to be any clear path to a peace plan in those words—even if he’s using them for negotiating leverage.
Adkins believes Iran will accept nothing less than a for-profit tolling system through the strait—it would be deemed a kind of service fee—and that Iranian control likely would keep traffic flows closer to half of their normal volumes. After all, most of the volumes flowing since mid-June were Iranian barrels. Typically, only about 10% of the traffic is from Iran. Even with more barrels redirected via pipelines—it will take at least a year for Saudi Arabia and the United Arab Emirates to build new pipes—that would keep at least 5% of the world’s oil offline for many more months. “That’s still a big number.”
“The Iranians so far have been pretty successful at slow playing everything and wearing people out,” said oil forecaster Dan Pickering, founder of the Pickering Energy Partners consulting and research firm. “It doesn’t look like the regime is very weakened.”
But Pickering is more focused on China than Iran. That’s because China emerged as the so-called swing importer, cutting its world-leading oil imports by roughly 5 million barrels a day and leaning on its oil and fuel strategic reserves that also lead the world. Essentially, global oil production volumes have begun picking back up, but demand hasn’t, yet, which is why oil prices dipped more than anticipated. That is likely to change.
“We’re in this honeymoon phase where China hasn’t come back yet,” Pickering said, arguing that he expects China to start buying more barrels by the end of August, if not sooner. “That’s a biggie. China didn’t cut its consumption dramatically; China cut its imports dramatically. I think that’s what folks are not paying enough attention to.”
Math doesn’t add up
As oil prices fell after the interim peace deal was announced in mid-June, traffic through the Strait of Hormuz never rebounded to even one-third of its typically volumes. At the same time, shipping and insurance costs for oil tankers at least doubled.
Now, the U.S. has again revoked Iran’s waiver to sell its oil worldwide without sanctions. Still, the U.S. benchmark for oil only hovered near $71 per barrel on July 10 as energy markets remained optimistic.
There was a quick pivot in early July to a potential global oil glut—the same oil industry fear that existed early this year before the war—with production volumes rising in the Americas and now rebounding in the Middle East.
“The surprising thing is how quickly the narrative shifted from tightness to glut,” Pickering said. “The market moved this pretty quickly to a non-issue, and so far that has been the correct call. You have to respect the market forces that said, ‘This is all now done with,’ and see what comes next.”
But, even if it was the correct call, he said, it doesn’t mean it will remain that way much longer.
The U.S. Strategic Petroleum Reserve, for instance, is now at its lowest level since 1983, but it still holds more than 300 million barrels of crude, which is down from 415 million barrels at the beginning of the war.
And because Trump wants to keep fuel prices lower, there’s little chance the U.S. starts replenishing its strategic reserves before the midterm elections this year, analysts said. Trump has authorized the overall release of 172 million barrels over several months, so supplies could still dip much lower before they’re built back up, maybe beginning next year. But it will still require replenishment eventually.
Likewise, little-known Cushing, Oklahoma, is considered the nation’s oil storage and trading hub. The consensus is that commercial crude storage inventories are dangerously low when Cushing dips below 20 million barrels. Last week, Cushing fell to 19.6 million barrels, versus 33.5 million barrels two years ago, after hitting a 12-year low of 18.9 million barrels in mid-June. Below 20 million barrels, much of the remaining oil is counted as unusable tank bottoms, because storage tanks cannot be fully emptied to remain functional, or gunky sediment.
During the war, the U.S. exported record volumes of oil and refined fuel, which pushed refining margins to record highs this summer and kept prices at the pump from declining further as oil prices fell from an April high of $114 per barrel. The U.S. exports helped partially offset refineries that were mothballed in the Middle East and China, as well as those damaged from Ukrainian attacks in Russia. Adkins estimated close to 7 million barrels a day of global refining capacity had come offline.
“The Chinese refiners will say, ‘Hey, I’m making pretty good margin now. I’m going to turn back on.’ That’s probably starting to happen right now,” Adkins said.
How the world changes
The average price at the pump for a gallon of regular unleaded skyrocketed to a May high of $4.56 and has since fallen to $3.88 as of July 10, according to AAA.
That’s hasn’t really changed behavior or dramatically weakened oil demand, said Jim Wicklund, a veteran oil analyst and managing director at the PPHB energy investment firm. Electric vehicle sales may have jumped some, but there’s no evidence of a sharper fundamental shift beyond existing trendlines, he said.
“I think everybody was stunned at the world’s dependence on oil,” Wicklund said, noting that the effective closure of Hormuz was the greatest energy supply shock in modern history. “But it’s kind of like the U.S. dependence on Chinese [critical minerals]. Doing something about it is the hard part. Being incensed by the fact that that they own the supply chains is one thing; doing something about it is another.”
And that ongoing reliance should equate to at least a $5 per barrel geopolitical risk premium being baked into oil prices for the foreseeable future, he said, separate from any incoming demand surges.
Even if global oil demand is plateauing, it’s not going away for decades to come. The Middle East and OPEC—especially with the exit of the UAE and the threatened exit of Iraq—may be weakened going forward, but they’ll remain centerpieces of the energy world, said Arjun Murti, energy macro and policy partner at the Veriten research and investment firm.
“When people say there’s going to be permanent behavior change, that’s not going to happen on a three-month basis,” Murti said. “I believe [oil] demand will normalize back to the trend prior to this war.”
If anything, countries will be motivated to develop more of their own energy resources, he said, to avoid overreliance on imports.
“You have to manufacture stuff in your own country,” Murti said. “You must have some control over your energy sources and technologies.” If you don’t you remain at the mercy of geopolitics and individuals.
