Oil markets have received some comparatively encouraging signals from the Middle East, but the improvement in physical supply has not yet translated into a decisive drop in prices. Maritime traffic through the Strait of Hormuz increased during September, with a rise in both visible transits and those more difficult to track. Flows have recovered to an estimated 85-90% of pre-conflict volumes, which has helped to contain new upward pressures on crude prices.
However, restoring crude flows is only part of the challenge. Supply chains remain disrupted, while inventory replenishment is sustaining demand. As a result, the recovery of exports has not been accompanied by a proportional decline in the price of oil. New attacks on vessels in October, along with the first US retaliation over the weekend, further highlight that the path back to normalcy is unlikely to be straightforward.
The underlying dispute remains unresolved. Iran seeks to impose its own conditions on traffic through the Strait of Hormuz, while the United States opposes this. Although the increase in transport volumes offers a plausible route towards more normal conditions, the recent escalation demonstrates that the risk of disruption remains significant. The possibility of new US military actions also implies that investors cannot rule out a further escalation of the conflict.
The evolution of the war between Russia and Ukraine adds a second source of uncertainty. Reports of a potential ceasefire covering energy infrastructure would be positive if realised. The Russian refining network has suffered considerable damage from Ukrainian attacks, limiting the supply of refined products. However, recent reports seem to have caught Ukraine by surprise, have not been confirmed by Russia, and come after similar headlines in September that ultimately did not materialise. For the markets, this advises caution rather than assuming imminent relief.
The distinction between crude and refined products is particularly important. Pressure on refining capacity keeps diesel prices well above crude. US refineries are operating near their limit, European capacity is constrained, utilisation rates in Russia have fallen sharply, and refining in the Middle East remains affected by the conflict. Even if crude supply improves, refining system bottlenecks could keep diesel and other product prices high.
For the US Administration, this poses an immediate political and economic challenge ahead of the midterm elections. Measures aimed at easing the burden on consumers may provide some support, but are unlikely to significantly reduce diesel prices in the short term. More broadly, the pressure is not limited to transport fuels. Ongoing disruptions also affect liquefied natural gas, sulphur, fertilisers, and other products that depend on secure regional trade routes.
Politically, the situation still resembles a stalemate. Negotiations may open the door for de-escalation, but Iran seems willing to bear the economic pressure and pursue a longer-term strategy. The regime remains in power and has shown little willingness to yield on the negotiating positions set earlier in the year. This limits the prospects for a quick diplomatic solution and leaves energy markets exposed to new episodes of volatility.
The central message is that better shipping data should not be confused with a complete solution. The increase in transits through the Strait of Hormuz is a positive development, but the fragile security situation, limited refining capacity, and persistent geopolitical risk are likely to keep oil and refined product prices high. At the same time, the resilience of the global economy and its adaptability over the past two months have been encouraging. Therefore, markets may continue to weigh the improvement in physical supply against a still considerable risk premium.