Oil steadies as blockade threat revives supply risk

Oil prices edged higher on Friday as Washington’s warning that it could maintain a naval blockade of Iran indefinitely revived fears of tighter crude supplies, countering pressure from a sharp rise in US inventories and a weaker global demand outlook.
Brent crude futures were up 1 cent at $87.08 a barrel by 0247 GMT, while US West Texas Intermediate crude rose 6 cents to $81.31. Both benchmarks were heading for weekly gains of about 4 per cent, even after falling more than 2 per cent on Thursday and snapping multi-session rallies.

The market has been caught between geopolitical risk and weakening consumption signals. The United States said it could sustain its naval blockade of Iran for an indefinite period and intensify economic pressure as ceasefire negotiations remained stalled. The warning renewed concern over exports from the Gulf and the security of the Strait of Hormuz, one of the world’s most important energy transit routes.

The strait has historically handled roughly a fifth of globally traded oil, making any interruption a major risk for refiners and consumers across Asia and Europe. Traffic through the waterway has been constrained by the Iran conflict, while uncertainty over negotiations to restore normal passage has kept a substantial geopolitical premium embedded in crude prices.

That premium helped limit Friday’s downside after a striking build in US crude inventories. Commercial crude stocks, excluding the Strategic Petroleum Reserve, rose by 17.4 million barrels in the week to August 7 to 424.4 million barrels. The increase was far larger than market expectations and reflected stronger imports alongside weaker exports.

US refinery activity remained strong, with crude inputs averaging about 17.2 million barrels a day and plants operating at 96.2 per cent of capacity. High utilisation typically supports crude demand, but the scale of the inventory increase suggested incoming supplies outpaced refinery consumption and exports during the week.

Demand expectations have also deteriorated as high fuel prices, trade disruptions and softer economic activity restrain consumption. Forecasts for world oil use have been revised lower, though projections vary substantially over how severely the Iran conflict will affect consumption and how rapidly energy flows through the Gulf can normalise.

The competing forecasts are shaping an unusually volatile market. Oil remains well below the peaks reached earlier in the year during the sharpest phase of the Iran conflict, but prices are still high enough to pose inflation risks for major importing economies. Elevated crude costs feed into transport, petrochemicals and manufacturing, while prolonged disruption in the Gulf can raise freight and insurance expenses even when physical supplies remain available.

Producers outside the immediate conflict zone have sought to keep barrels moving to customers, while Gulf exporters have worked to preserve shipments through alternative routes and adjusted logistics. Those measures have reduced the danger of an abrupt global shortage, although replacement capacity would be limited if flows through Hormuz suffered another severe interruption.

For traders, the central question is whether geopolitical pressure will overwhelm increasingly bearish demand and inventory signals. A prolonged blockade could tighten prompt supplies and strengthen the front of the futures curve, while progress in diplomacy or a sustained recovery in exports through Hormuz would expose prices more fully to slowing consumption and rising stockpiles.

The US energy outlook still points to tight global balances during the third quarter, with inventories forecast to fall by about 2.2 million barrels a day as disrupted Gulf supply outweighs weaker consumption. That estimate is sharply below projections made earlier in the conflict, underlining how rapidly the market balance has changed as supply routes, production and demand respond to higher prices.

Oil’s latest move also illustrates how geopolitical headlines are limiting the impact of otherwise bearish fundamental data. A weekly stock increase of the magnitude reported in the United States would normally put substantial pressure on futures, yet the prospect of prolonged military restrictions around a critical exporting region has encouraged traders to retain a risk premium.