Crude oil prices remain trapped in a volatile tug-of-war, as geopolitical tensions in the Middle East keep the market in a state of high alert. Brent crude for October delivery settled at $90.12 per barrel, while WTI for September closed at $84.67, and Dubai crude for October ended at $81.8.

Key spreads across the three benchmarks have retreated from highs but still hold a backwardated structure. The Brent M1-M2 spread narrowed to $2.19 per barrel, WTI M1-M2 fell to $3.18, and Dubai M1-M2 dropped to $2.31. President Trump's last-minute cancellation of a strike on Iran has tempered near-term risk premiums, but starkly differing statements from both sides keep the situation in a cycle of escalation and de-escalation. While tensions around the Strait are rising, shipping remains halted.

The forward curve has shifted lower over the past week, reflecting a decline in overall risk premiums rather than a fundamental weakening. This price recovery lacks solid fundamental support. Regional spreads show the Brent Dubai EFS narrowing to $11.8 per barrel, while the WTI-Brent spread tightened to $3.41, closing the arbitrage window for US crude exports.

Physical crude differentials have been recovering since late July. The BFOETW benchmark's differential has risen notably, with Forties and BNB crude flipping from negative to a premium of around $4 per barrel. West African and Latin American grades have also seen improvements, while Middle Eastern differentials, closely tied to Strait developments, have surged then retreated. North American crude differentials remain in a reasonable range. The dual blockade of the Hormuz Strait and Bab el-Mandeb Strait is pushing buyers toward Western crude, while the temporary halt of CPC crude exports boosted light crude differentials before resuming.

Product cracks are showing divergence, with diesel and jet fuel extending gains amid tight Western supplies from Russia's extended export ban. Gasoline and naphtha cracks have slowed, while fuel oil cracks remain stable. Global crude inventories, excluding China and US SPR, have risen to 3.12 billion barrels, up 160 million barrels from end-June, thanks to releases from floating storage in the Persian Gulf. Floating crude stocks have increased to 110 million barrels, with sanctioned oil at sea holding at 274 million barrels, as Russian floating storage gains offset declines from Iran. The backlog of cargoes stranded in the Persian Gulf after the conflict has been largely cleared.

China's onshore crude inventories have dropped to around 1.2 billion barrels. While Chinese refinery runs are showing signs of stabilizing, the dual crises in the Hormuz and Red Sea straits are impacting supply, with uncertainty over the recovery pace. China remains in a phase of prioritizing inventory use amid high freight rates and uncertain strait reopening.

The Strait is back under dual blockade, with the Houthis threatening the Bab el-Mandeb Strait and attacking Saudi tankers. Middle Eastern crude loadings have fallen again to 12.8 million barrels per day, down 5 million barrels per day year-on-year. Further declines are expected if the blockade persists. Russian crude loadings have dropped to 4.2 million barrels per day but remain historically high, as some refineries restart, though product exports continue to decline. A Ukrainian attack on a tanker at Novorossiysk temporarily halted CPC crude shipments, but operations have since resumed with limited impact on near-term volumes.

Global refinery outages are expected to drop to 9.2 million barrels per day this week, still 3-4 million barrels per day above last year. Russian processing rates are recovering with restarts, but new disruptions from Middle Eastern energy infrastructure attacks partially offset the decline. Uncertainty over the Hormuz Strait's reopening continues to pressure refinery operations. By August 7, global outages are forecast to fall further to around 8 million barrels per day, driven by the end of planned maintenance in China and Japan, though new shutdowns in Western Europe will limit the drop.

As of July 31, Russian refinery outages are estimated at 2.8 million barrels per day. Several refineries, including Saratov, Taif, Volgograd, Moscow, Omsk, Taneco, Norilsk, and Komsomolsk, have resumed operations after attacks and maintenance, though Ryazan and Norilsk are only partially back. The Antipinsky refinery in Siberia has extinguished a fire from a drone attack. Key facilities like Kirishi, Astrakhan, Salavat, Samara hub, Tuapse, and Slavyansk remain offline. Middle Eastern refinery outages averaged 500,000 barrels per day in the week to July 31. A Houthi attack on Jizan and Yanbu refineries has shut Jizan for repairs, targeting an August 15 restart. The Tehran refinery reported operational issues from an offsite incident. Oman's Duqm and Sohar refineries are running at full capacity, while SATORP is at 70%, and Ruwais is ramping up. SAMREF, YASREF, and Ras Tanura are fully operational, and Bahrain's Sitra refinery seeks higher throughput but remains below capacity. If the Hormuz Strait closure persists, product export blockages could lead to tank tops and ultimately limit refinery runs.

On the geopolitical front, the US has warned Ukraine against attacking CPC-related facilities due to Chevron's stake in the Tengiz field, but attacks on Russian refineries are expected to continue. In the Middle East, the situation remains in a standoff, with Trump's last-minute pause on strikes against Iran cooling tensions, but the Strait remains blocked. Iran's attacks on passing vessels are increasing, further complicating transit.

The overall outlook sees oil prices still driven by Hormuz Strait-related geopolitical games, trapped in a binary dilemma. If the US and Iran reach a new deal to reopen the Strait, prices could drop sharply. However, if the blockade continues and the Bab el-Mandeb Strait faces disruptions, prices could surge. August's oil market is set to be a turbulent and unpredictable journey.

Strategy-wise, geopolitical premiums are dominating price volatility, with no significant fundamental gap. Short-term sentiment is driving the market, requiring caution against reversal risks. Downside risks include a Middle East war de-escalation, Strait reopening, and a global economic crisis. Upside risks come from a stronger-than-expected Chinese demand recovery and further deterioration in the Red Sea situation.