Oil Surges Above $88 as Hormuz Truce Collapses, Reserves Dwindle
The collapse of a 60-day truce has reignited the Iran conflict and pushed oil prices sharply higher, leaving the US to weigh escalation against accepting Iranian tolls on the Strait of Hormuz as global emergency stockpiles run dangerously low.
A collapsed ceasefire has triggered a second round of fighting between the US and Iran, immediately disrupting the Strait of Hormuz. The US has reinstated a naval blockade on Iranian oil exports after Iran opened fire on vessels navigating closer to the Omani shoreline on July 7. The resumption of hostilities has abruptly ended a brief period of market calm.
Benchmark crude plummeted from a peak of $124 in early May to $68 in early July as the truce took hold. Prices have since surged back above $88 a barrel as of July 17. US retail gasoline has climbed back to $4 a gallon, boosted by record US export volumes and global refinery outages that have pushed refining margins to all-time highs.
The price spike comes as global safety nets thin. The US Strategic Petroleum Reserve sits at a 43-year low, leaving markets reliant on China, which has slashed crude imports by nearly 5 million barrels a day to balance global supply. “We’re in the fifth month of this. We have fewer strategic reserves. We have less flexibility, less optionality. It’s a more precarious starting point for round two,” said Dan Pickering, founder of Pickering Energy Partners.
Iran controls a waterway handling nearly 20% of the world’s energy flows and is demanding the right to charge service fees for passage. Gregory Brew, a senior analyst for Iran and energy with the Eurasia Group, noted that avoiding an Iranian toll structure now seems “unrealistic.” “Any question about tolling’s impact on [oil] volumes is downstream of a more basic one—whether the strait is reliably open at all,” said Claire Jungman, director of maritime risk and intelligence for Vortexa.
The Trump administration must now choose between escalating strikes, attempting to outlast Iran, or ceding control of the strait to guarantee its reopening. “The options are to escalate or cut a deal. And I think the [Trump] administration is likely to do the first, see it fail, and end up with the second,” Brew said. The president briefly floated a 20% US toll on Hormuz traffic before abandoning the idea.
The trajectory of oil prices carries significant macroeconomic weight ahead of US midterm elections in November. “Oil remains a top risk…given its importance in inflation and, ultimately, monetary policy. The SPR draws can’t continue forever,” said David Russell, global head of market strategy at TradeStation. Escalation carries the risk of pushing crude well past $100, as US strikes have already prompted Iranian retaliation against energy infrastructure in the UAE, Kuwait, and Bahrain.
Regardless of the immediate diplomatic or military outcome, the conflict is permanently altering Middle East energy logistics. Gulf states are accelerating pipeline projects to bypass the strait entirely. The UAE is doubling its West-East pipeline and planning a new Fujairah port, while Iraq is building the Basra-Haditha Pipeline to route crude through Turkey, Syria, and Jordan. “What we’re going to wind up with in five years is multiple export routes out of the Middle East,” Pickering said.
