Oil prices climb as US-Iran conflict shows no signs of slowing

Oil prices continued to climb in early Asian trade on Wednesday as the renewed hostilities between the United States and Iran showed no signs of slowing.

At the time of writing the report on Wednesday, Brent crude was trading at $92.44, up 1.57% on the session, while West Texas Intermediate was changing hands at $85.51, up 1.39%. Both benchmarks are now at five-week highs and have been consistently climbing since hitting lows during the July 4th weekend, says oilprice.com.

The latest move higher was driven by another night of U.S. military operations against Iranian targets, marking the 11th consecutive evening of strikes. According to U.S. Central Command (CENTCOM), American forces targeted “Iranian military operations centers, maritime assets, aircraft hangars, drone storage facilities and logistics infrastructure” in an effort to degrade Iran’s ability to threaten commercial shipping.

CENTCOM claims Iran has attacked more than 30 commercial vessels over the past three months, but insists that the waterway remains open to commercial traffic. For oil markets, and more importantly for shipping insurers, U.S. claims that the Strait is open are less relevant than a pledge from Iran that it will stop attacking ships.

The most recent U.S. attacks came after Kuwait intercepted Iranian drones in what was the latest in a spree of Iranian strikes against U.S. allies in the region.

For oil markets, the next major escalation point will be in the Red Sea, where Yemen's Iran-backed Houthi movement has threatened to target vessels carrying Saudi crude through the Bab el-Mandeb Strait.

Saudi Arabia has increasingly relied on Red Sea export routes since Iran began threatening tanker traffic through the Strait of Hormuz. Any disruption at Bab el-Mandeb would significantly increase pressure on one of the few remaining alternative export routes available to Gulf producers.

In a worrying sign of the risk in the region, three Saudi oil tankers U-turned in the Red Sea on Tuesday after the Houthis declared a blockade on Saudi oil passing through the Bab el-Mandeb.

As attacks continue, there is currently little sign of diplomatic progress, with President Trump signaling that military operations are likely to intensify and saying the United States currently has "no interest" in renewed negotiations.

Meanwhile, fresh U.S. inventory data offered mixed news on physical markets, with the API reporting that U.S. crude and distillate inventories increased last week while gasoline stocks declined. Official figures from the EIA are due out later on Wednesday and will provide further insight into how the U.S. oil market is faring.

For now, geopolitics and the conflict in the Middle East will remain the key driver for oil markets, with risk on the rise and very few signs of an off-ramp anywhere. As military exchanges continue across multiple fronts and shipping security deteriorates around both Hormuz and the Bab el-Mandeb, the upside risk for oil prices is only going to climb.

Reuters adds:

China's Next Move Could Decide Where Oil Prices Go This Year
China's crude imports plunged 41.3% year over year in June to a decade-low 7.12 million bpd, the key factor that kept oil prices from spiking further during the Iran war.
Beijing has already started draining its estimated 1.2 billion to 1.4 billion barrel stockpile, pulling roughly 41 million barrels from reserves in June alone, according to the IEA
With oil back near $90 a barrel and Gulf producers cutting official selling prices, Goldman Sachs says China could ramp up buying again as soon as this month

China’s demand for crude oil imports and the pace of its refined products exports will help shape the trend in oil prices through the end of the year, alongside the supply disruptions in the Middle East.

Decade-low Chinese crude oil imports have eased upward pressure on oil prices in recent months despite the worst supply disruption in the history of oil markets. China’s tumbling demand for crude oil imports was the key demand-side factor in capping the price hikes since the Iran war began.

The market is now increasingly wondering what China will do next and how the immediate crude import and fuel export policies of the world’s top crude importer will influence regional and global oil and fuel markets.
In another development Reuters said: Asian refiners are seeking to ship crude oil from Saudi Arabia's Red Sea port through the Suez Canal and around Africa after Yemen's Iran-aligned Houthis said they would impose a naval blockade on Saudi Arabia.
The move marks the latest redirection of oil flows due to the U.S.-Israeli war ​with Iran that has sharply cut supplies, pushing refiners to seek alternative barrels or undertake different routes. Two ​oil tankers carrying Saudi crude to Asia reversed course in the Red Sea on Tuesday after threats from ⁠the Houthis, while vessel crossings via the Strait of Hormuz dropped further at the start of the week.