Oil above $114 raises fresh fuel and airfare worries

Dubai: Oil’s latest rally is putting fuel, freight and airline costs back in focus for consumers and businesses, with Brent crude rising above $114 a barrel on Wednesday after the US-Iran standoff over the Strait of Hormuz showed little sign of easing.

Gulf energy flows remain constrained, physical supply is tight, and traders are starting to price in the possibility that the blockade around Iranian ports could last longer than initially expected. That keeps pressure on crude, refined fuels and shipping costs, with the risk that higher energy prices feed back into inflation at a time when central banks are already reluctant to cut interest rates.

Brent rose more than 3% to trade above $114 a barrel, while West Texas Intermediate moved past $103. The rally followed reports that US President Donald Trump had instructed aides to prepare for an extended naval blockade aimed at restricting Iranian oil exports, while diplomatic efforts to restart talks have yet to produce a breakthrough.

Joseph Dahrieh, Managing Director at Tickmill, said oil’s advance reflects a market that is still being driven by disruption risk in the Middle East.

“Oil prices moved higher on Wednesday, extending their recent rebound as expectations of a prolonged US blockade on Iranian ports reinforced concerns over sustained supply disruptions in the Middle East,” he said. “As a result, physical markets could remain constrained, sustaining the upward pressure on prices.”

Why consumers should care

The immediate concern is not only the price of crude. Gasoline, diesel and jet fuel have already been affected by the disruption, which means the pressure can move quickly into transport, airfares, delivery charges and operating costs for businesses.

A sustained rise in oil prices also makes the inflation problem harder for central banks. Higher energy costs tend to work their way through economies in stages, first through fuel and logistics, then through food, imported goods and travel. That is why markets are watching the oil move alongside upcoming interest-rate decisions in the US, Europe, the UK and Canada.

The Strait of Hormuz remains the centre of the risk. The waterway is one of the world’s most important routes for crude, natural gas and refined products, and any prolonged restriction leaves energy buyers competing for fewer available cargoes. Even where production capacity exists, barrels still need to reach customers.

Traders are weighing not only how much oil producers can pump, but how much can actually be shipped while the Gulf remains under pressure.

Blockade risk drives prices

The latest price move follows weeks of disruption since the conflict began in late February. A ceasefire has held since early April, but negotiations remain stalled, while the US and Iran remain locked in a standoff over shipping and sanctions pressure.

CNN reported that mediators expect Iran to submit a revised proposal in the coming days, though markets are waiting for evidence of actual progress. Until that happens, traders are likely to keep a risk premium in oil prices.

Dahrieh said the near-term direction of crude will remain tied closely to diplomacy and security conditions in the region.

“Looking ahead, oil markets are likely to remain highly sensitive to geopolitical developments,” he said. “Continued restrictions in the Middle East could sustain upward pressure on crude in the near term, while elevated prices could erode demand levels. Conversely, any diplomatic progress could gradually ease the pressure on prices.”

A prolonged blockade supports crude by limiting flows. Any credible path back to talks could pull some of that premium out of the market, especially if traders believe exports can resume more freely.

UAE exit adds another layer

The rally also comes a day after the UAE announced it would exit OPEC and the wider OPEC+ alliance from May 1, ending nearly six decades of participation in coordinated oil production policy.

In normal conditions, such a decision would carry immediate implications for supply expectations because the UAE has invested heavily in expanding production capacity. Current market conditions, however, are being dominated by logistics and shipping constraints, which means the short-term impact is likely to be limited.

Dahrieh said the UAE decision is still important for the longer-term oil balance.

“Market participants could continue to take into account the latest United Arab Emirates’ decision to exit OPEC,” he said. “The decision could affect the dynamic of the market. While the near-term impact could remain limited due to ongoing export bottlenecks, the UAE’s significant spare capacity suggests that future output increases could alter the supply balance once logistical constraints ease, potentially weighing on prices over time.”

That is the split the market is now trying to price. In the short run, a blocked or constrained Gulf keeps supply tight and prices supported. Once shipping conditions improve, additional UAE output could become a bigger factor, especially if the country uses its greater flexibility to bring more barrels to market.

Demand risk builds

High prices can eventually limit demand, especially when households and companies start adjusting behaviour. Airlines face higher fuel bills, freight operators have less room to absorb costs, and consumers may see pressure through pump prices, fares and goods that rely on long supply chains.

The risk for oil producers is that a prolonged move above $100 starts to damage consumption, particularly in price-sensitive markets. That could cap the rally if economic activity slows or if consumers reduce travel and spending.

The current market, though, is still being led by supply anxiety. US crude and product inventories fell in the week ended April 24, according to estimates from the American Petroleum Institute, adding to the sense that the physical market remains tight.

That is why traders are watching inventories, diplomatic signals and naval activity at the same time. Any one of those can move prices quickly in the current environment.

What happens next

Oil’s next move will depend on whether the blockade threat hardens or diplomacy starts to gain ground. A revised Iranian proposal could ease some pressure if it is seen as credible, but failure to restart talks would keep the market focused on supply risk.

The UAE’s OPEC exit adds a longer-term question over supply discipline, but the immediate driver remains the Gulf disruption. Until barrels can move freely, the market is likely to keep rewarding any sign of tighter physical supply.

- With inputs from Bloomberg.