Key Driver: Geopolitical Turmoil Dictates Supply and Demand

Geopolitical disruptions continue to be the sole driving force behind oil price fluctuations, as repetitive regional conflicts directly impact supply and demand dynamics. The return of geopolitical risk premiums has pushed oil prices into a volatile range, with analysts projecting a period of high volatility and wide-ranging oscillations. While tighter supply provides a floor for prices, the unpredictable nature of geopolitical variables makes sustained unilateral trends unlikely.

Oil Prices Extend Rally Amid Geopolitical Uncertainty

Since the start of August, oil prices have rallied for five consecutive sessions. As of the close on August 11, the Brent front-month contract settled at $88.91 per barrel, effectively filling the $6-7 per barrel gap created after the contract rollover. Technically, prices have returned to the middle Bollinger Band, indicating a neutral-to-bullish stance. Looking ahead, the market will continue to gyrate around supply disruptions triggered by geopolitical tensions.

Peace Prospects Fade as Tensions Escalate

After the failure of the first memorandum of understanding between Iran and the United States, bilateral relations have further deteriorated. On the Iranian side, internal leadership reshuffling has been accompanied by an alliance with the Houthi movement, which controls the Strait of Hormuz and threatens the safety of the Bab el-Mandeb strait. This signals a hardening of Tehran's diplomatic stance. In the United States, President Trump's frequent use of sanctions has become routine, but with the approaching midterm elections, the impact of his rhetoric has diminished. Regardless of the outcome of negotiations, the significant gap in demands between the two sides, combined with a mutual unwillingness to compromise, suggests that geopolitical tensions will persist, with increasingly dim prospects for peace.

Strait Blockades Tighten, Crude Supply Shrinks

Recent attacks on vessels transiting the Strait of Hormuz and the Bab el-Mandeb have increased the risk of maritime passage. Shipping data shows that on Monday, August 10, only six ships passed through the Strait of Hormuz. Over the past ten days, the average daily transit has been 11 vessels, a stark contrast to the normal range of 125-140 ships. Our tracking of vessel schedules also reveals a month-on-month decline in both Middle East seaborne exports and arrivals at major importing nations (China, Japan, India, South Korea). Considering that Saudi Arabia and the UAE have alternative pipeline routes, a recovery of just 70% of normal traffic through the Strait of Hormuz would be considered acceptable. However, current transit levels are far below that pre-crisis benchmark. Our valuation model keeps WTI's fair value near $76 per barrel, while the current geopolitical risk premium embedded in futures prices has risen to $7 per barrel. In summary, oil prices will continue to exhibit high volatility and wide-ranging oscillations under the influence of geopolitical disruptions.