Energy markets are slightly retreating today as prices ease after yesterday’s jump of over 4% for WTI and 3.4% for Brent. Light Crude Oil Futures (WTI) are now at 100.92, down 1.23%. Meanwhile, ICE Brent crude Futures also declined, trading at 106.49, down 1.19%.
The upward factors for oil prices remain in place amid the absence of any sign of an imminent diplomatic settlement to the Middle East war, keeping the door open to escalation risks that could deepen the damage to the region’s oil production and export infrastructure.
Conversely, oil prices may face downward pressure, helping to balance prices or slow their rise, reflecting a partial adaptation of energy supply chains in the Middle East to the closure of the Strait of Hormuz, alongside escalating economic risks amid pessimism about the possibility of lowering interest rates.
Iraq and Pakistan have secured bilateral agreements with Tehran to ship oil and liquefied natural gas through the Gulf, demonstrating Iran’s growing dominance over the region.
While the U.S. continues its blockade of Iranian ports, Claudio Steuer of the Oxford Institute for Energy Studies notes that Iran has shifted from simply blocking the Strait of Hormuz to “controlling access to it,” effectively turning the waterway into a “controlled corridor” rather than a neutral route. Iraq recently secured safe passage for two tankers carrying 4 million barrels of crude, while Pakistan is receiving Qatari LNG shipments under similar arrangements.
Meanwhile, Gulf energy producers are using emergency backup routes to maintain global supply, according to The Wall Street Journal. Saudi Aramco is relying heavily on its East-West pipeline to transport oil to the Red Sea port of Yanbu, while the United Arab Emirates has redirected more crude through Fujairah. These alternatives allow a significant share of oil and natural gas to reach global markets despite the sharp decline in regional exports since the conflict began.
Both nations are now exploring ways to permanently expand the capacity of these critical oil links. Although these land-based and pipeline routes cannot fully replace the scale of traditional shipping or prevent shortages of products like jet fuel, they serve as essential shock absorbers for the energy market. While trucking cannot fully replace shipping capacity or cost efficiency, it has become a vital shock absorber for global markets.
While this might help alleviate some of the supply shortfall and allow for partial adjustment, prolonging the war risks escalating tensions and reciprocal attacks among the parties involved. This, in turn, could increase the likelihood of broader targeting of regional oil infrastructure. The Trump administration might resort to extensive strikes against Iranian energy facilities to extract concessions in negotiations, but this could instead provoke a wider Iranian response targeting other countries in the region. This scenario, in turn, could keep the market volatile and contribute to further declines in oil prices.
On the economic side, the energy price inflation reflected in a substantial rise in consumer prices, as seen in yesterday’s data, could ultimately have a negative impact on future oil prices.
Following the acceleration of the Consumer Price Index to 3.8% year-on-year in April, the probability of the Federal Reserve maintaining interest rates at their current levels through the end of the year has declined. This shift has favoured a more hawkish outlook, with the likelihood of a rate increase before year-end now standing at 30.6% according to the CME FedWatch Tool. Markets are increasingly pricing in a hike rather than a cut as inflationary pressures persist.
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