Oil's Volatile Week: Supply Risks and the Strait of Hormuz Factor
Oil prices retreated on Friday but still closed the week with a gain of over 8 percent, as escalating attacks on Middle East shipping lanes continue to rattle global energy markets. The volatility underscores the fragile balance of supply chains that Southeast Asian economies, heavily reliant on imported energy, must navigate.
What drove the weekly surge in crude prices?
Brent crude futures fell $3.45 (3.21 percent) to $104.18 a barrel at 1132 GMT, while U.S. West Texas Intermediate (WTI) dropped $2.96 (2.89 percent) to $99.52. Both benchmarks had earlier hit their highest levels since mid-May before reversing gains on reports that Middle Eastern foreign ministers are exploring a temporary arrangement with Iran to manage shipping through the Strait of Hormuz.
The pullback follows a Thursday rally of more than 6 percent for both benchmarks, triggered by an escalation in shipping attacks. As UBS energy analyst Giovanni Staunovo noted, “Some headlines of possible new talks in the Middle East are weighing moderately on oil prices today. I keep seeing near-term risks to the upside for oil prices, but we should expect ongoing high price volatility too.”
How are Saudi Arabia and key shipping chokepoints affected?
Satellite imagery on Thursday showed smoke near Saudi Arabia's East-West Pipeline, a critical alternative route for the kingdom to export crude without transiting Hormuz. The International Energy Agency reported that Saudi crude supply fell by 2.3 million barrels per day month-on-month to 6 million bpd in August, the lowest level in over three decades, citing attacks on energy facilities.
Further south, Yemen's Iran-aligned Houthis reached the island of Perim in the Bab el-Mandeb Strait on Friday, according to four Yemeni government sources. This move potentially tightens their grip on another vital shipping artery connecting the Red Sea to the Indian Ocean.
What is the current status of Strait of Hormuz transits?
Preliminary ship-tracking data showed vessel transits at Hormuz fell to seven on Thursday from 11 the previous day. Before the Iran war began in late February, the strait handled approximately 125 commodity vessels daily, carrying one-fifth of global oil and liquefied natural gas supplies.
Iran has stated it attacked 10 ships near the strait on Wednesday, following U.S. strikes on five Iranian oil tankers. The Islamic Revolutionary Guard Corps has signaled it would escalate its response to further attacks, keeping the region on a knife's edge.
Why is diesel hitting record highs in the United States?
Supply disruptions from the Iran war, compounded by Ukrainian attacks on Russian refineries, pushed the U.S. national average diesel price past $6 a gallon for the first time on Thursday, per price tracker GasBuddy. This reflects a broader tightening in refined product markets.
“Refined products, particularly diesel, are feeling a one-two punch right now,” said Tim Waterer, chief market analyst at KCM Trade. “As long as both the Gulf shipping constraints and Russian refining outages remain in play, diesel and other refined products are likely to show a higher upside tendency than the broader crude market.”
What are the latest forecasts and macroeconomic implications?
Commerzbank has revised its year-end Brent forecast upward to $85 a barrel from $75, while raising diesel projections to $1,200 a ton from $950 and jet fuel to $1,230 a ton from $980. These adjustments reflect persistent supply-side pressures.
In the euro zone, two European Central Bank policymakers opened the door to further interest rate hikes if war-driven energy prices continue to push up other costs. For ASEAN economies, the sustained elevation in energy prices presents a dual challenge: managing inflation while ensuring energy security in a region that imports a significant share of its hydrocarbons.
Frequently asked questions about the oil market
How long could the current supply disruptions last?
The duration remains highly uncertain, contingent on diplomatic efforts and the trajectory of regional conflicts. Markets are pricing in sustained volatility, with near-term risks skewed to the upside.
What does this mean for Southeast Asian fuel prices?
Southeast Asian nations, as net importers of crude and refined products, are likely to face higher import costs. This could translate into elevated domestic fuel prices, affecting transportation and industrial sectors across the region.
Are there alternative supply routes being considered?
Saudi Arabia's East-West Pipeline offers some redundancy, but its capacity is limited. The Bab el-Mandeb and Hormuz straits remain critical chokepoints, and any prolonged disruption would test the resilience of global supply chains.
Photo: CNA