BREAKINGVIEWS-Oil’s elevated price could yet become a floor

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Yawen Chen

LONDON, Aug 24 (Reuters Breakingviews) - Oil traders are running out of reasons to relax. Over the past three months, Brent crude has traded well below the $120-a-barrel peaks seen in March and April, despite severe disruption around the Strait of Hormuz. That relative calm rested on three fragile supports: hopes that Washington and Tehran would eventually reach an agreement, the release of emergency government reserves, and weaker demand, especially from China.

The first of those looks shakiest. The 60-day window for a U.S.-Iran agreement expired last Monday without a deal, and U.S. President Donald Trump says no talks are planned. Meanwhile, Treasury Secretary Scott Bessent is promising a sweeping financial offensive that could extend pressure to countries trading with Tehran. That may squeeze Iran economically but is unlikely to lead to a full-blown reopening of Hormuz. If anything, it could provoke further Iranian retaliation.

Meanwhile, the world has already blown through much of the oil reserves mobilised as insurance against the war. International Energy Agency (IEA) members agreed in March to release 400 million barrels of emergency stocks. By July, about 290 million barrels had been released - equivalent to roughly five weeks of the 8 million barrels a day of Middle Eastern supply that analysts estimate is offline. China also helped absorb the shock by cutting crude imports sharply, while Gulf producers pushed more oil through alternative routes including Saudi Arabia’s pipeline to Yanbu on the Red Sea and the United Arab Emirates’s pipeline to Fujairah outside Hormuz.

Now inventories are under more strain. Analysts at Vortexa reckon oil being carried at sea fell by 211 million barrels in the 40 days since mid-July, while oil stored in tanks on land dropped by another 94 million barrels. If the fall at sea merely reflected tankers arriving and unloading, onshore stocks should have risen. Instead, they fell too, which suggests the market is burning through both buffers at once. Together, that means roughly 300 million fewer barrels were readily available to meet demand. Onshore stocks are now about 93 million barrels below their seasonal average, having been 127 million above it in late March.

The remaining supply fixes are similarly fragile. Hormuz traffic was about 90% below late-February levels in the week to August 16, according to Lloyd’s List, while Houthi threats are making Saudi Arabia’s Red Sea bypass less dependable. Refiners have little incentive to ease the pressure either: shortages of diesel and other fuels have kept processing margins unusually high.

The oil bears can still argue their case. China has already shown it can consume and process less oil, while governments retain substantial emergency reserves. Trump may also seek a compromise if expensive fuel becomes politically intolerable.

Yet none of those fixes resolves a prolonged Hormuz disruption. If inventories continue to fall, escalation by the U.S. or Iran could send crude above $100. Even without one, today’s $92 may start to look like the floor.

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CONTEXT NEWS

The U.S. threatened Iran with what it called "the greatest ​financial offensive ever marshalled" as it prepared to roll out economic sanctions on August 24 that target Iran's trade partners.

"At dawn begins an economic D-Day — the single greatest financial offensive ​ever marshalled against an adversary," U.S. Treasury Secretary Scott Bessent wrote in an opinion piece published in the Financial Times on August 23.

Brent crude futures fell $1.49, or 1.6%, to $92.90 by 0649 GMT on August 24, while U.S. West Texas Intermediate crude was at $85.32 a barrel, down $1.74, or 2%.

(Editing by Aimee Donnellan; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on CHEN/yawen.chen@thomsonreuters.com))