Oil Prices Near $100 — And More Rises to Come

Yesterday, oil prices surged to $100, and it wasn’t even the biggest news as President Trump announced a new wave of global tariffs. Hormuz is effectively shut, the oil isn’t getting through, but it is now more than just Hormuz being closed. It is about shrinking inventories, oil stuck in the ground, a growing number of chokepoints and shortages at refineries.

All three crisis at once means this crisis is really serious and is likely to lead to evern higher petrol prices, higher mortgage rates and higher inflation — and also there’s not many policies left to deal with this. There’s no easy fix for cost-push inflation.

Chokepoints

If we look at the world’s biggest oil chokepoints, we now have disruptions in both Hormuz and Bab-el-Mandeb. These two make up 25 million barrels a day, a quarter of the world supply. What’s happening is that to dodge Hormuz closure, Saudi Arabia sent 70% of its exports to Yanbu on the Red Sea. But this has now become a target for Houthi rebels. Two tankers have been hit and five diverted, the usual flows have fallen from 9 million to 4 million. It’s a big loss. J.P. Morgan estimate Bab-el Mandeb problems alone could add $20 a barrel. Some ships are going through Suez but it’s too shallow for the largest full-laden tankers. Sending tankers around the Cape of Good Hope adds weeks and cost on to the price of oil.

But, it is much more than crude oil, the biggest loss is in refining capacity. The Iran crisis has seen a bigger loss of diesel and refined fuel exports. And then on top of that there are major disruptions from Russian exports of diesel due to Ukrainian drone strikes. Even diesel refineries outside warzones are being hit with unplanned outages due to summer heat and higher runs. US refineries are also running close to full capacity. The result is that the premium for diesel rose sharply above crude oil.

Now this premium or crack spread has started to fall because Crude oil is belatedly catching up with the reality of supply disruption.

But the important thing is that the price motorists pay for diesel and petrol never really came down that much. This shows US oil prices and gas/petrol prices, there was a small dip, but both oil and gas prices are set to rise. As the crisis drags on, the big question is how much will prices rise by?

Strategic reserves

It is true that the initial closure of Hormuz had less negative impact than feared. This was achieved by reducing demand, increasing supply and most importantly releasing from reserves. Now this is a critical point, even since last week’s video, the US have drained their strategic reserves at a record pace. Another 5.1 million barrels in just one week. It’s really important to state this is unsustainable – especially since the operational limit is closer to 250 million barrels or 12 weeks of a similar drawdown.

The US is ironically relying on increasing oil  imports from Canada. This might sound paradoxical because the US has increased its overall oil exports, but it needs Canadian crude to refine into diesel. Yet, despite Canadian crude being critical to the US. just two days ago the US signed 50% tariffs on Canada products like beer and hockey sticks. But Canada has promised to respond tariff for tariff, dollar for dollar, and the US known it does have dependence on Canadian oil. It’s another example, of multiple crisis colliding.

What happens next?

What does this mean for the global economy? Rising oil prices will put upward pressure on US inflation. But this comes at a bad time The new Fed chairman, Kevin Warsh has said he has no tolerance for persistently elevated inflation, even when the headline figures on US inflation fell, he cautioned it may not reflect the real state of underlying inflation. The point is he is keen to bring inflation down, and that means higher interest rates. But the problem is that sharply rising oil prices are a very good predictor of recession. You can see here how often big rises in oil prices precipitated or at least corresponded with major recession higher Oil prices causes the worst kind of inflation. Higher prices but less consumer spending power. If you add into the mix higher interest rates to reduce inflation, then it causes a big slowdown. Of course, 2026 is not comparable to the 1970s when oil intensity was much greater, but the Hormuz crisis has led to not just rising oil prices, but rising fertiliser, food and commodity inflation. There have been widespread price rises beyond oil. And this price rise is not helped by global heating and a drought in many parts of the world.  

Demand

Another part of the equation is that the first part of the oil shock in March to May, was managed by reducing demand. China in particular cut back on imports, relying on inventories. And because the closure of Hormuz for a long time had less negative impact than expected, there is perhaps a complacency that we don’t need to be concerned, But, just before the second Hormuz shock, demand was recovering as countries started to consider restocking. China could become a major buyer this autumn. This is why the rising price of oil is much more serious than in March, there is less room to breathe.

Big Losers

The big losers from this new stage of the oil crisis will be oil importers like Europe, Africa and Asia. Europe has a twin vulnerability with gas storage levels low, and now LNG supplies from Saudi and Qatar being reduced. European gas prices have risen to the highest level since the conflict began. The UK has a new Prime Minister Andy Burnham promising to address the cost of living crisis. This involves VAT on electricity removed, saving households £45 a year, the problem is that rising gas prices will wipe this small saving away. You can have all the charisma of a cheeky northern chappie, but if oil prices spike, it will be a cost of living crisis out of your control. And of course, the threat of inflation has seen a renewed rise in mortgage costs and bond yields. Higher mortgage costs affect households, higher bond yields increase the cost of borrowing. It’s nice to start your first 100 days by tax giveaways, but if borrowing increases, it will be more expensive. Also, in the US, with interest rate costs rising faster than nominal GDP, there will be a growing political pressure to reduce interest rates to make debt affordable. But, then you can’t target higher inflation.

But the crisis will extend beyond the US and Europe. India survived the initial crisis by capping petrol prices and hoping the crisis would blow over. It did work for a few months, but India imports half its crude oil through Bab al-Mandeb, and if this continues to be disrupted, there will be actual shortages which can’t be fixed by capping prices.

What happens next, the IEA still project an oil surplus by the year’s end, but only if Strait traffic recovers and that requires a lasting peace deal, which is hard to see. The problem is now there is much less room for manoeuvre. The inventories are not there like in March, and refineries are close to max capacity.  Even if there was a quick resolution, it would take time for oil and LNG refineries to fully come back online. There will be increased switch away from oil based products, the only real winners are those selling electric cars. Though, it’s not a complete win for renewables, Coal demand has reached record levels. So what happens next, in the short-term, the multiple crisis is a big deal and will mean more pain at the pumps, but the escalation of the conflict is worrying in terms of a fragile economy. W

 

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