Oil traders have maintained a broadly bearish stance on crude even as hostilities in the Middle East intensify and the conflict extends into the Red Sea — a wager on a swift peace deal that could be upended by mounting supply risks.

Earlier in the week, Brent crude fell below $80 per barrel and WTI slipped under $75 after President Trump stated that peace talks between the United States and Iran had resumed. Iranian officials, however, denied that any such negotiations were underway. Separately, Iran is engaged in discussions with Oman regarding control over the Strait of Hormuz — the narrow chokepoint connecting the Persian Gulf to the Gulf of Oman and the open ocean — a development that traders interpreted as further bearish news for oil prices.

Meanwhile, Yemen's Houthis have been attacking Saudi tankers in the Red Sea, forcing yet another rerouting of Saudi oil exports. Saudi Arabia, one of the world's three largest crude producers and the de facto leader of OPEC, relies on multiple export corridors to sustain its roughly 9–10 million barrels per day of shipments. The alternative route now in heavier use runs through the Suez Canal and a pipeline connecting to Egypt's Mediterranean coast — a corridor with considerably less capacity than the East-West pipeline that links the Persian Gulf to the Red Sea port of Yanbu. The rerouting imposes additional constraints on Saudi export capacity, though traders appear largely unconcerned.

In another development from the Persian Gulf, Iran's parliament is reviewing a bill that would deny access to the Strait of Hormuz for U.S., Israeli, and other vessels deemed "hostile." Such a measure would further complicate the free passage of energy carriers through the region and would do nothing to improve prospects for peace between Tehran and Washington. This news appears to have caught traders' attention, as oil prices rose on Friday, reflecting growing concern over potential extended restrictions on tanker traffic through the Strait of Hormuz — a waterway that, before the U.S. and Israel attacked Iran at the end of February, carried approximately one-fifth of global oil and gas trade.

Related: ADNOC Reports 15 Vessel Attacks as Hormuz Risks Mount

The current dynamic is unusual. In past oil crises, futures prices have typically reflected real-world events rather than speculative positioning. The most recent parallel was the 2022 price surge, when Western sanctions on Russia — a top-three global exporter — appeared to threaten a significant portion of world oil flows. Once Russian crude and fuel was redirected from Western to Eastern buyers instead of being removed from the market, a perception took hold that oil, like love, always finds a way. That episode also benefited from substantial OPEC spare capacity held in reserve, which helped cap upside risk.

This time, however, there is actual physical destruction of supply — a reality many traders are discounting. According to the International Energy Agency's monthly Oil Market Report, global oil production as of July stood 9.4 million barrels per day below pre-war levels. That figure came despite a sharp rebound of more than 4 million barrels daily in June following a ceasefire agreement between the U.S. and Iran — a deal that lasted less than a month.

In a separate report, the IEA cautioned that "nearly 3 million barrels per day of refining capacity in the region has been shut due to attacks and a lack of viable export outlets," complicating the global refined product landscape. Additionally, crude inventories in the Gulf have declined after Gulf states released a flood of oil following the June ceasefire agreement.

According to Kpler data cited by Reuters' Ron Bousso, Gulf states exported 70 million barrels of crude in the weeks following the deal, leaving roughly 80 million barrels in storage. Those volumes could be released if the Strait of Hormuz reopens, but doing so would deplete remaining reserves. In short, global crude supply continues to tighten — yet prices are not reflecting this trajectory.

This disconnect is problematic because it raises the risk that any future price shock will be considerably more severe than it might otherwise have been. Analysts observed early in the war that it takes several months for crude supply tightness to fully materialize on physical markets and feed through to prices. Five months after the initial strikes, the market is now much closer to that point of full materialization.

Even so, analysts remain broadly confident that the conflict will end soon. ING commodity analysts wrote on Friday: "Despite clear signs of progress in recent days, the tenor of the rhetoric and growing distrust between the US and Iran mean things could go from bad to worse once again. For now, we hold onto our view that flows will start to normalise through the third quarter, which leaves us expecting Brent to average $80/bbl this quarter."

Others, however, are beginning to question whether a full return to normal is achievable — even after the war eventually concludes. Iran's discussions about charging fees for vessels transiting the Strait of Hormuz, along with proposals to co-manage the waterway with Oman, suggest that post-war Middle East oil flows will be structurally different. And until alternative pipeline infrastructure is built to compensate, prices are likely to remain elevated.

By Irina Slav for OilPrice.com