Hormuz Stalemate Raises Risk of Oil Prices Hitting $120

The United States Oil Fund (AMEX:USO) closed at 134.64 dollars on Friday, up a modest 0.07 percent, but the calm on the surface hides a market that is bracing for something bigger. As the Hormuz stalemate raises fears of a supply squeeze later this year, traders are watching the strait, Chinese buying patterns and shrinking fuel stockpiles far more closely than the day's small price wiggle suggests.

USO, which tracks crude oil prices, sits well above the midpoint of its 52 week range of 102.42 to 142.33 dollars, and its relative strength index of 61.31 points to a market leaning bullish without yet being overbought. That positioning fits a commodity caught between two competing forces: a war that has choked off tanker traffic through one of the world's most important chokepoints, and a physical market that, for now, still has just enough cushion to avoid panic.

Why the Hormuz Standoff Keeps Traders on Edge

The conflict between the United States and Iran, now stretching past five months, has repeatedly whipsawed oil prices through attacks on tankers, export blockades and threats from both governments. This week brought fresh confusion rather than resolution. Iran insists the Strait of Hormuz stays shut until Washington ends the war and meets its demands, while President Trump claimed the United States has total control over the waterway. Brent crude, the global benchmark, pushed above 89 dollars a barrel early in the week on that uncertainty before slipping back as traders weighed the risk of demand destruction from prolonged high fuel prices.

Tanker traffic through the strait remains near two month lows, and that persistent bottleneck is the crux of the issue. Futures markets have not raced to record highs despite what analysts describe as the most severe disruption oil markets have faced in years, largely because of buffers built up before the fighting started.

The Buffers Keeping a Full Blown Spike at Bay

Three cushions have kept crude prices from spiraling: a decade low pace of Chinese imports through May and June, coordinated releases from strategic petroleum reserves worldwide, and a large volume of oil already on the water when the war broke out in late February. Each of those buffers is now thinning. China has started buying more crude again after its lull, strategic stockpiles are being drawn down, and the oil that was floating at sea has largely reached its destinations.

Global inventories are falling as a result, and that combination, tighter supply plus renewed Chinese demand, is what has analysts flagging a possible price spike in the coming weeks if Hormuz traffic does not recover.

Refined Products Are Where the Real Squeeze Is

While crude futures react to headlines out of Washington and Tehran, the tighter market right now is in refined products, especially diesel, gasoil and jet fuel. Refining margins in the Atlantic Basin have hit record highs, driven by disruptions at refineries across the Middle East and Russia, along with peak summer fuel demand. The International Energy Agency's latest monthly report noted that global refinery crude throughput in July, despite rising by 1.8 million barrels per day from June, still ran nearly 5 million barrels per day below year earlier levels.

Seaborne trade in petroleum products dropped by 3.8 million barrels per day even as U.S. fuel exports rose by roughly 700,000 barrels per day compared with a year ago, a gap driven by collapsing diesel and jet fuel shipments out of Russia and the Middle East. The IEA expects the market to swing back to surplus by year end but cautioned that risks remain substantial and that reopening the strait has become more urgent as inventory cushions run thin.

What Analysts Say Could Trigger a Bigger Move

Amrita Sen of Energy Aspects has described the crude market's fundamentals as increasingly bullish. Kieran Tompkins of Capital Economics puts a number on the risk, saying that if the strait stays closed and OECD oil inventories keep draining quickly, the market could hit a tipping point around the start of the fourth quarter, potentially pushing prices into the 120 to 140 dollar per barrel range based on past episodes of severe disruption.

Ole Hansen at Saxo Bank points to crack spreads and refining margins hitting exceptional levels as the clearest sign of how tight the underlying energy market has become, driven more by product shortages than by crude supply itself. He expects volatility to persist until the strait genuinely reopens and production visibly recovers, with the shape of the futures curve serving as an early warning sign of just how strained things get.

Will the Strait Reopen Before Inventories Run Dry

The gap between rhetoric and reality is the story right now. Washington and Tehran keep trading claims about who controls the waterway, while inventories quietly shrink beneath the noise. Whether the standoff breaks before stockpiles hit critical lows, sometime around late September or early October by some estimates, will determine whether USO's current climb turns into a sharper spike or fades as a false alarm.

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