The escalation of tensions between the US and Iran dominates market sentiment. Diplomatic efforts have stalled, with both sides rejecting proposed peace terms and continuing to issue hostile rhetoric. Military activity has intensified around the Strait of Hormuz, including strikes on vessels and drone attacks across the Gulf region. This instability threatens a key global oil chokepoint, prompting involvement from other nations such as the UK and France. As a result, oil prices have rebounded, with Brent staying above USD 100 per barrel, reflecting fears of prolonged disruption and tightening supply.
On the supply side, countries are rapidly diversifying away from Middle Eastern crude. Asian buyers are sourcing more oil from the Americas, including new shipments from Mexico. Russian oil remains a key alternative despite logistical disruptions caused by Ukrainian attacks, which have reduced seaborne exports even as pipeline flows increase. Meanwhile, US product exports have surged to record levels, and new refining capacity in countries like Angola is partially helping to offset shortages.
Demand dynamics are weakening, especially in Asia. Rising inflation in major economies such as China and India is dampening consumption. Evidence includes a sharp drop in Chinese car sales and broader economic pressures, while Southeast Asia also faces significant inflation. Given the strong link between economic health and oil demand, these trends point to reduced consumption growth.
Finally, downstream activity - particularly in China - is under pressure. Independent refineries are cutting output due to high crude costs, weak margins, and subdued demand. Operating rates are falling, and losses are mounting, with broader implications for global refining and product markets.