Hormuz tensions threaten renewed oil price rise before midterms

Oil markets are pricing in calm after the Iran conflict eased, but analysts told Fortune that supply risks around the Strait of Hormuz remain unresolved. They warned that restricted tanker traffic, depleted reserves and a likely rebound in Chinese imports could send crude prices higher again before U.S. midterm elections.

Fortune reported that crude fell below $70 a barrel at the start of the week as traders treated the conflict as largely settled. By July 10, the U.S. benchmark was still near $71 even after President Donald Trump said an interim peace arrangement with Iran was “over” following new drone and rocket exchanges, according to Fortune.

Marshall Adkins, head of energy at Raymond James, told Fortune that markets were assuming conditions would return to normal too quickly. Adkins said Iran’s past conduct made a smooth reset unlikely, and he expects Tehran to seek a paid tolling system for passage through the strait.

Fortune reported that U.S. efforts to move more shipping closer to Oman were met with Iranian fire on some vessels last week, followed by a U.S. response. At a July 8 NATO summit in Turkey, Trump said he did not expect full war to resume and said any clash would end quickly, Fortune reported.

Traffic through Hormuz remains constrained

The Strait of Hormuz has not returned to normal levels, according to Fortune. Since an interim deal was announced in mid-June, traffic through the route has remained below one-third of typical volumes, while tanker shipping and insurance costs have at least doubled.

Adkins told Fortune that Iranian control could keep flows around half their normal level. He said most recent volumes through the strait have been Iranian barrels, while Iran typically accounts for about 10% of traffic.

Fortune reported that additional pipeline capacity from Saudi Arabia and the United Arab Emirates would take at least a year to build. Even with some rerouting, Adkins estimated that at least 5% of global oil supply could remain offline for many months.

Dan Pickering, founder of Pickering Energy Partners, told Fortune that Iran has been able to slow the process and wear down pressure from outside powers. He said the Iranian regime did not appear greatly weakened.

China and reserves could shift prices

Pickering told Fortune that China may matter more for prices than Iran in the coming weeks. He said China reduced imports by about 5 million barrels a day while drawing on strategic oil and fuel reserves, rather than cutting consumption sharply.

Pickering said he expects China to resume larger purchases by the end of August, if not earlier. Fortune reported that analysts expect crude could rise toward $90 a barrel when Chinese demand and refinery buying return.

Global reserves have also fallen. Fortune reported that almost 1 billion barrels of petroleum reserves worldwide have been drawn down and are not being replaced, while the U.S. Strategic Petroleum Reserve is at its lowest level since 1983.

The U.S. reserve still holds more than 300 million barrels, down from 415 million at the start of the war, according to Fortune. Analysts told Fortune that Trump is unlikely to refill the reserve before the midterms because he wants to keep fuel prices lower; Fortune also reported that he authorized releases totaling 172 million barrels over several months.

Cushing, Oklahoma, the main U.S. oil storage and trading hub, has also tightened. Fortune reported that inventories fell to 19.6 million barrels last week, below the 20 million level analysts view as dangerous, and down from 33.5 million two years earlier.

Fuel prices remain politically sensitive

Fortune reported that U.S. oil and refined-fuel exports reached record levels during the war, helping offset refinery outages in the Middle East, China and Russia. Adkins estimated that close to 7 million barrels a day of global refining capacity had gone offline.

AAA data cited by Fortune showed regular gasoline averaging $3.88 a gallon on July 10, down from a May high of $4.56. Jim Wicklund, managing director at PPHB, told Fortune that those prices had not caused a dramatic break in oil demand.

Arjun Murti of Veriten told Fortune that oil demand is likely to return to its prewar trend. He said countries may respond by developing more domestic energy capacity to reduce exposure to imports and geopolitics.

This story draws on original reporting from Fortune.