The Iraq war has been going on for 100 days. Why haven't oil prices skyrocketed, and will they soar in the future?

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The Strait of Hormuz has been blocked for more than three months, cutting off more than 10 million barrels per day of Middle Eastern crude oil supply and causing the most severe oil supply shock in modern history. However, Brent crude has fallen from over $140—a record high during the early stage of the Iran war—to below $100, and the industry’s pessimistic predictions of $200 per barrel have not materialized.

"People thought things would be much worse," said U.S. President Trump on Friday. "Today I saw $96 a barrel; people once thought it would reach $300."

The Iran war has lasted nearly a hundred days. On the 5th, Trump declared that the Iranian military had been "completely destroyed," and barely after his remarks, on the 6th, U.S. forces launched another airstrike against parts of Iran. Iran immediately retaliated by launching missile attacks at U.S. Air Force bases in Kuwait and facilities of the Fifth Fleet in Bahrain.

In the course of both fighting and negotiation, a range of emergency measures is allowing the global oil market to absorb this supply shock with resilience beyond expectations.

Maria Angelicoussis, CEO of Angelicoussis Group, the world’s largest Greek shipowner, stated:

"The conflict has lasted more than three months, and the world has shown surprising resilience. Commodity prices have risen 50% to 60%, Asian LNG prices have surged 90%, but have not reached the sky-high levels—at least not as I personally expected."

Three forces are holding down oil prices

On the demand side, as the world’s largest oil importer, China’s crude imports in May plunged nearly 40% compared to last year's average (Vortexa data), enough to offset one-third to one-fifth of the supply lost due to the war. Reasons include: China has halted its years-long increase of strategic oil reserves, coal-based chemical production is replacing some oil-based capacity, and booming sales of electric vehicles are suppressing gasoline consumption.

According to estimates by Kpler and Energy Aspects, China’s refinery throughput in May-June fell to approximately 13 million barrels per day—the last time this operating level was seen was early 2020, compared to last year’s average of 14.8 million barrels per day.

Warren Patterson, Head of Commodity Strategy at ING, said, "China's substantial withdrawal from the crude oil market has played a key role in rebalancing the global market and helped suppress oil prices."

While demand is shrinking, supply has also shown unexpected flexibility—mainly from the United States.

Thanks to the shale revolution started more than a decade ago, the U.S. has become a net exporter of crude and refined products; ample domestic energy is also what gave Trump the confidence to wage war against Iran. Since the war started at the end of February, the U.S. has further played the world’s most important swing supplier role, with U.S. crude and fuel exports in May exceeding last year’s average by more than 2 million barrels per day.

The Trump administration has pledged to release 172 million barrels from the Strategic Petroleum Reserve (SPR), executing faster than expected—one week last month saw SPR releases reach 1.4 million barrels per day, nearly half shipped to Europe and other overseas destinations.

Washington also played another card: exempting some Russian crude sanctions to allow India to increase its purchases. In May, Russia’s average exports to India, the world’s third-largest crude importer, reached 1.76 million barrels per day, up 63% from February.

Alternative export routes provide extra buffer. Saudi Arabia uses east-west pipelines to ship crude to the Red Sea; the UAE moves crude by pipeline to Fujairah port outside the Persian Gulf. Governments have also coordinated historic, joint strategic reserve releases, and pre-war market oversupply has absorbed part of the shock.

Even though daily vessel traffic through the strait has plummeted from nearly 100 ships before the conflict to just 2–3 ships, a small number still pass through government-to-government transactions or increasingly covert ways. According to a U.S. Central Command official, nearly 1,000 commercial vessels have transited the strait in the past two months.

The buffer is being depleted

These emergency measures stabilized oil prices, but they are themselves being exhausted.

Global oil inventories are declining at a record pace. Greg Sharenow, Head of Commodity Portfolio at Pacific Investment Management Company (Pimco) and manager of nearly $24 billion in assets, issued a direct warning: "Every week, the system tightens by 70 to 80 million barrels. This cannot last forever. In the coming months—in broad terms—you’ll face a system that may lose its resilience, because the buffer has been severely depleted."

The U.S. is also under pressure. Last week, total U.S. oil inventories dropped to the lowest in more than 20 years; critical storage hub Cushing's stocks are nearing their operational lower limit, strategic reserves are nearly depleted, and fuel inventories face key lows as the summer consumption peak approaches. Domestic refineries are running over capacity to meet demand, competing with exports for oil, pushing U.S. crude premiums in Asia above those of Middle Eastern crude.

"We do not have the capacity to sustain such export levels," Sharenow said.

Will prices skyrocket next?

Trump’s continuous calls for negotiations have to some extent suppressed oil prices. Brent crude futures' open interest has fallen to the lowest since August last year, extreme market volatility forces traders to cut risk exposure, and price collapses driven by peace expectations have kicked many longs out of the market—only daring to take small positions and short terms.

But prospects for negotiation are uncertain. Raymond James analyst Pavel Molchanov pointed out the "minimum threshold" for resuming shipping in the strait would be an average of at least 20 vessels per day for a week—"This is not realistic before a lasting U.S.-Iran reconciliation is achieved, and the timeline keeps being postponed."

Time Magazine pointed out an awkward reality: even if negotiations succeed, the best outcome is to reopen the previously unimpeded strait and to secure a nuclear deal no more complete than the 2015 Iran deal—in short, after fighting a hundred days, the best outcome is to return to the starting point.

Most traders consider when China will restore its pre-war crude purchase levels as the key variable for oil price trends. But even if these issues are all resolved, the market still faces an unavoidable gap.

Tom Baker, Head of Vitol Bahrain (the largest independent oil trader globally), said at a conference this week:

"Basically everyone expects the solution is just around the corner. But no matter how quickly capacity comes back, you still face a gap—whatever you call it—a billion barrels of oil, which have vanished."

Global standby supply is rapidly diminishing. According to Sharenow's assessment, the buffer may be exhausted in the next few months—at that point, even relatively small supply disruptions can trigger sharp price spikes.

Risk Warning and DisclaimerThe market has risks, investments must be cautious. This article does not constitute individual investment advice, nor does it take into account special investment goals, financial conditions, or needs of particular users. Users should consider whether any opinions, viewpoints, or conclusions in this article are suited to their specific circumstances. Investing based on this article is at your own risk. ```