Middle East Conflict Rages for 5 Months, Yet Oil Prices Remain Under Control! Key Reasons Explained — But Markets Shouldn’t Celebrate Too Soon

The United States and Israel launched military actions against Iran at the end of February, sparking market fears that about one-fifth of global crude oil shipments could be disrupted if the Strait of Hormuz were blocked. Analysts predicted international oil prices could surge to $150 per barrel, with extreme scenarios even reaching $200. However, nearly five months after the outbreak of hostilities, actual oil price movements have fallen far short of market expectations.

Brent crude futures briefly rose to $126 per barrel following the outbreak of conflict, still below the historical peak of $147 set in 2008. From February 28, when hostilities began, to June 11, when U.S. President Trump announced a halt to airstrikes on Iran, the average price of Brent crude was around $101. By early July, prices had even dipped back to pre-war levels of approximately $70, indicating that markets did not spiral out of control due to the Middle East conflict.

China's cooling demand unexpectedly emerged as the biggest pressure on oil prices. Markets initially expected Middle East supply risks to push prices higher, but the biggest variable came from the demand side.

China, the world’s largest crude oil importer, saw its crude imports drop to a near 10-year low by June. Not only are fuel exports restricted, but more people are switching from private cars to electric taxis. Combined with reduced raw material procurement in the petrochemical industry, global crude demand has fallen below market expectations, offsetting some of the supply risks.

On the supply side, the United States has continued to play a crucial role in stabilizing the market. As the world’s largest oil producer, the U.S. set a record high daily crude output of 13.93 million barrels in April. At the same time, the U.S. coordinated with the International Energy Agency (IEA) to release 400 million barrels of Strategic Petroleum Reserves (SPR) in March, alleviating market concerns over supply disruptions and reducing upward pressure on oil prices.

Market sentiment has also suppressed oil price gains. U.S. President Trump repeatedly signaled peace agreements and the resumption of navigation through the Strait of Hormuz, causing markets to repeatedly revise expectations about conflict escalation and discouraging investors from building large long positions.

Ilia Bouchouev, a researcher at the Oxford Institute for Energy Studies, described the current market as one where “everyone is bullish, but no one is truly betting big on long positions.” Data from the ICE exchange shows that while funds increased their long positions in Brent crude by the largest margin in nearly six months during the week ending July 14, the current position size of about $14.8 billion is still over 50% smaller than the six-year high reached at the end of March.

Ole Hansen, Head of Commodity Strategy at Saxo Bank, pointed out that the market is experiencing “news fatigue,” with investors becoming increasingly desensitized to new conflict reports, thereby reducing the impact of geopolitical news on oil prices.

Meanwhile, Saudi Arabia increased crude exports from the Yanbu port on the Red Sea, effectively diversifying transportation pressure previously reliant on the Strait of Hormuz. Navigation through the Strait briefly resumed in June, temporarily easing market concerns about supply shortages. However, as hostilities reignited in July, shipping volumes declined again. Traders note, however, that physical crude supply remains ample globally, limiting the upward impact of recent conflict escalations on oil prices.

The price spread of Europe’s North Sea Forties crude, which reflects immediate market supply and demand, has shifted from a record high premium in April to a discount, indicating no immediate supply tightness in the physical market. Senior crude trader Adi Imsirovic stated that “near-term physical crude remains quite ample,” but warned that this situation may not last. If the conflict escalates further or supply is truly disrupted, oil prices could experience sharp volatility.

Despite oil prices not surging dramatically, the impact of the Middle East conflict has not disappeared. With renewed hostile actions in the Strait of Hormuz recently, Brent crude briefly approached $90 per barrel this month, pushing U.S. gasoline prices back above $4 per gallon. Energy prices have once again become a focal point for inflation risks.

Alex Hodes, Chief Energy Markets Strategist at StoneX, noted that if the Strait of Hormuz remains blocked under tight global refining capacity, gasoline prices will inevitably push inflationary pressures higher.

Traders also warn that global crude inventories have visibly declined after months of drawdowns. The safety cushion used initially to buffer supply shocks is gradually shrinking. If the conflict continues to escalate, oil prices could become far more volatile than in the past few months.

Kevin Book, Managing Director at energy consultancy ClearView Energy, stated that every oil supply disruption could escalate into a fuel crisis. With disrupted shipping in the Gulf region and partial shutdowns of Russian refining facilities, global refined product supply has become more fragile. If the conflict continues to burn, the risk of worsening fuel crises remains.

For Trump, oil price trends are increasingly turning into political pressure—not only could rising prices fuel inflation, but they may also affect voter sentiment ahead of the November midterm elections. Market participants believe that unless the situation in the Strait of Hormuz truly stabilizes, it will remain the biggest wildcard for global energy markets.