U.S.-Iran Pause Pushes Oil Lower Despite Shipping Disruptions

Oil prices moved sharply lower Monday morning as the United States paused its military strikes against Iran, offering the market some relief after nearly two weeks of escalating conflict.

Prompt WTI futures fell by more than $6 per barrel after the U.S. halted strikes following 13 consecutive days of attacks. Iran also announced that it had stopped retaliatory strikes against the United States in response to the pause. The move raised hopes that both countries may be stepping back from further escalation, at least temporarily.

Reports that President Trump had set aside plans to expand the conflict added to the downward pressure on prices. Instead of increasing military action, the administration is allowing discussions between the United States and Iran to continue. Iranian and Omani deputy foreign ministers also held what were described as constructive talks over the weekend regarding shipping through the Strait of Hormuz.

Those developments helped push equity futures higher and the U.S. dollar lower as broader financial markets responded to the reduction in immediate geopolitical risk.

However, the situation remains far from resolved. Shipping activity through the Strait of Hormuz remains extremely limited, even after the U.S. and Iran paused their strikes. Fewer than 10 commodity vessels passed through the waterway each day over the weekend. Iranian media also reported that six ships attempting to cross without Tehran's permission were turned around Monday morning.

Iran maintains that vessels must use a route closer to its coast, while the United States has encouraged ships to travel near Oman. That disagreement continues to create uncertainty around one of the world's most important energy shipping routes.

The risks are also spreading beyond the Strait of Hormuz. Traffic through the Bab el-Mandeb Strait fell to its lowest level in months on Sunday after Iran-backed Houthis attacked Saudi oil installations along the Red Sea coast. Only 11 commodity vessels crossed the waterway that day.

The Houthis have threatened to restrict Saudi oil exports through the Red Sea, creating another challenge for crude shipments from the Middle East. Disruptions in both the Strait of Hormuz and the Bab el-Mandeb limit the routes for moving oil to global buyers, particularly to refiners in Asia.

Alternative routes are available, but they are longer, more complicated, and more expensive. Saudi crude shipped from the Red Sea port of Yanbu can travel toward Asia through the Suez Canal, but draft restrictions may require vessels to partially unload and use the SUMED pipeline. Other workarounds, including trucking fuel oil from Iraq to Turkey, may also help replace some of the disrupted supply.

The market appears to be betting that companies can adapt by rerouting shipments, using inventories, and finding alternative sources of supply. A similar adjustment occurred after Russia's invasion of Ukraine, when Russian crude was redirected toward China and India while Europe increased imports from the Americas and Africa.

Still, adapting does not eliminate the costs or risks. Middle Eastern exports remain constrained, physical crude prices recently climbed to two-month highs, and a lasting agreement between the United States and Iran remains uncertain.

Meanwhile, U.S. drilling activity declined slightly. The U.S. crude oil rig count fell by two to 450 during the week ending July 24. Despite the weekly decline, the total was 10 rigs higher than a month earlier and 35 rigs above the same period last year. Canada's oil rig count increased by two to 138.

Energy prices are also creating new questions for the inflation outlook. Oil prices had rebounded approximately 35% from their early-month low to $97 per barrel before Monday's decline. Under the assumption that oil averages $93 per barrel in August, headline inflation forecasts for July and August have moved higher.

The Federal Reserve is still expected to leave interest rates unchanged at its July meeting. However, continued geopolitical conflict and attacks on energy infrastructure could keep upward pressure on fuel costs and complicate the inflation picture.

For now, oil prices are responding to the pause in U.S.-Iran strikes and the possibility of additional diplomacy. But with shipping through two major waterways still restricted, drone attacks continuing across the region, and no lasting political agreement in place, energy markets remain exposed to sudden changes.