What could push oil above $90 after an 11% weekly surge?

Dubai: Brent crude may need a prolonged disruption through the Strait of Hormuz or clear evidence of tightening global inventories to break above $90 a barrel, despite heading for its biggest weekly gain since April.

The global benchmark traded around $85 on Friday and was on course to gain about 11% this week, while West Texas Intermediate moved towards $80.

Oil prices have climbed close to their highest level in about a month after renewed attacks between the US and Iran disrupted Middle East supply and reduced tanker movements through Hormuz, the route used for about a fifth of global oil flows.

Yet Brent has struggled to move beyond this week's high of $87.55, even after the conflict widened across the region and reports indicated that no oil tankers crossed the Strait in either direction on Thursday.

Chris Weston, Head of Research at Pepperstone, said the market was signalling that traders still believed negotiations remained possible.

“The question now is what additional catalyst is required to push Brent through Tuesday's highs and towards $90 when so much negative news has already been priced in,” Weston said.

“It would likely require clear evidence that inventory levels are beginning to tighten materially and, more importantly, a growing belief that both sides are unwilling to come to the negotiating table, leaving the Strait of Hormuz disrupted for a far longer period than markets currently anticipate.”

The reaction in oil prices has been more restrained than many traders expected given the scale of the military escalation across the region.

The US launched another wave of attacks on Iran this week, while Tehran responded with strikes targeting US bases in Kuwait, Jordan and Bahrain. Qatar also said its armed forces intercepted missiles aimed at the country.

Brent nevertheless spent much of the week trading within a relatively narrow range.

“One might reasonably have expected Brent crude to push above this week's highs of $87.55 and make a run towards $90, yet the opposite is true,” Weston said.

“Instead, we've now seen three consecutive days of relatively tight trading ranges, with Brent crude remaining comfortably contained within Tuesday's high-low range.”

The market's ability to absorb increasingly aggressive rhetoric and repeated military exchanges suggests traders continue to expect diplomacy to eventually return.

The Strait of Hormuz continues to dominate trading decisions because around 20% of global oil supply moves through the waterway.

Visible tanker traffic has slowed considerably, although some cargoes continue to move through ship-to-ship transfers near Oman.

Questions over the security of shipments intensified after Iran targeted vessels carrying UAE crude earlier this week.

The UAE subsequently sold between eight million and 10 million barrels of offshore crude to Asian refiners for loading outside the Strait, according to traders familiar with the transactions.

Two Iran-linked tankers carrying cooking fuel have also been making repeated course changes in the Gulf of Oman and Arabian Sea while the US naval blockade tightened.

The effects are already spreading beyond crude markets.

Profit margins for US refiners have climbed to record levels as supplies of diesel and gasoline tighten, while fuel markets in Europe are also showing signs of stress.

Russian exports have also fallen after Ukrainian attacks on refineries prompted Moscow to ban diesel exports, creating another layer of pressure on global fuel supplies.

The longer those disruptions persist, the greater the risk that higher costs begin feeding into petrol prices, airline tickets, freight rates and consumer goods.

Weston said traders largely view the Houthis as acting in line with Tehran's broader strategy rather than independently.

Fresh threats against Saudi energy infrastructure therefore have not yet generated the kind of panic buying often seen during previous Middle East crises.

“Should we see meaningful signs of convergence between Iran and the US, traders expect Tehran would quickly rein in Houthi activity,” Weston said.

“It is this belief that continues to ring-fence that particular risk and helps explain why the oil market has, so far, remained relatively well contained despite the increasingly hostile rhetoric.”

Markets are now focused on two developments.

The first is whether oil inventories begin falling fast enough to signal a genuine supply shortage.

The second is whether both sides move further away from negotiations and towards a longer disruption in Hormuz.

Until one of those changes materialises, traders appear comfortable keeping Brent trapped below the $90 mark despite one of the most volatile geopolitical backdrops the oil market has faced this year.

- With inputs from Bloomberg.