Escalating Middle East conflict threatens to push oil prices beyond previous peaks
Rising tensions in the Middle East and new supply bottlenecks are tightening global oil markets, raising the risk of price spikes above recent records.
Oil prices rose above $100 a barrel on Thursday, the highest level since May, as renewed hostilities in the Middle East tighten key supply routes. Analysts note that attacks on tankers in the Strait of Hormuz and a Houthi blockade of the Bab al-Mandeb strait have curtailed roughly 12 million barrels per day of crude that previously bypassed the conflict zone.
"The conflict has entered a decidedly more dangerous phase," said Helima Croft, head of global strategy at RBC Capital Markets. "It could shift the sentiment of ‘the market always finds a workaround’ camp."
The disruption forces oil to be rerouted through longer, less efficient paths such as the Suez Canal, where depth limitations prevent the largest tankers from passing, extending transit times from four to eight weeks, according to JPMorgan's Natasha Kaneva.
Maritime insurers are also reassessing coverage. The Lloyd’s Market Association warned that vessels paying Iran a $1-$2 per barrel toll could lose insurance protection, as such payments violate U.S. sanctions.
Compounding the Middle East strain, Ukrainian drone strikes on Russian refineries and the Caspian Pipeline Consortium have reduced Russian diesel exports by about 800,000 barrels per day, removing roughly 12% of global diesel supply, said Andy Lipow of Lipow Oil Associates.
Global crude inventories have fallen by 1.3 billion barrels over the past five months, with the U.S. Strategic Petroleum Reserve down to its lowest level since 1983 and commercial stockpiles approaching operational minima. Analysts caution that dwindling reserves limit the market’s ability to absorb further supply shocks.
China’s pre-war stockpiles have helped keep demand in check, but analysts estimate the country will need to increase imports within three to four months, adding further pressure on global supply.
"Oil could test the 2022 highs above $120 a barrel by October," said Daan Struyven, head of oil research at Goldman Sachs.
"If a full regional war breaks out, oil could set a new record above $150 a barrel," added Croft.
The market remains balanced for now, with demand reductions still outweighing supply constraints, but analysts warn that continued disruptions could drive prices to historic levels.