As investors continue to factor in expectations of a prolonged conflict in the Middle East, U.S. crude oil futures surged to their highest level in 20 months. On Thursday, West Texas Intermediate (WTI) crude futures jumped 8.5%, settling near $81 per barrel, marking the highest close since July 2024. Concurrently, the global benchmark Brent crude futures also finished above $85 per barrel. The U.S. administration stated it is evaluating multiple response options to alleviate pressure from the oil price spike triggered by Iranian military actions, leading to a slight pullback in crude prices during after-hours trading. Potential measures under consideration include releasing crude from the U.S. Strategic Petroleum Reserve and direct purchases of crude futures contracts by the U.S. Treasury Department.

Earlier that day, China directed its major refiners to suspend exports of diesel and gasoline. This move indicates China's priority to secure domestic energy supplies, though the policy may impact international consumers. Meanwhile, Japanese refiners have requested their government to release strategic petroleum reserves. In a separate development, Kuwait has reduced processing rates at three of its refineries.

Middle Eastern Arab states and Israel reported intercepting missiles and drones originating from Iran through Thursday. Qatar has advised residents to stay indoors. Iran claimed it attacked a tanker in the Persian Gulf, highlighting significant risks to shipping security in this energy-rich region.

Priyanka Sachdeva, a Senior Market Analyst at Phillip Nova Pte, noted, "Another successful attack on a tanker or infrastructure, or a sustained supply disruption, could trigger another sharp spike in oil prices." Market concerns are primarily focused on the Strait of Hormuz, a critical maritime chokeline for approximately 20% of global oil supply. Although Iranian military commander Amir Heydari stated they "do not see it at all" as likely that the strait would be closed, the passage is effectively blocked as very few shipowners are willing to risk transit, even with insurance offers from London-based insurers. This has led to a backlog of crude supplies, forcing some producers to halt production.

To break the deadlock at the Strait of Hormuz—a key waterway connecting the Persian Gulf and the Indian Ocean—the U.S. has proposed a plan involving insurance guarantees for transiting vessels and potential naval escorts. However, traders have generally expressed skepticism towards this proposal.

U.S. crude futures have outperformed Brent, driven by market concerns that prolonged disruption at the Strait of Hormuz would boost demand for WTI crude, which is perceived as less affected by the Gulf bottleneck. Additional support for U.S. crude prices comes from rising freight costs and tightening domestic supply due to seasonal refinery maintenance.

This market dynamic is also reflected in the prompt spreads—the price difference between the two nearest monthly contracts—of the two benchmark crudes. Brent's prompt spread widened by nearly $4 per barrel in just over a week, while WTI's corresponding spread widened by only about $2 per barrel, highlighting more severe short-term supply tightness in the North Sea market.

The conflict has not only driven up prices for crude oil, natural gas, and refined products, increasing transportation costs, but is also having a widening impact on producers and importers reliant on the region's energy supplies, reigniting market concerns about inflation.

Aggregated ship-tracking data shows traffic through the Strait of Hormuz has plummeted by over 95%, with major crude carriers and liquefied natural gas vessels choosing to avoid the route. The few vessels still sailing have exited the Gulf with their location transmitters switched off, a common practice in conflict zones.

According to data from the International Energy Agency (IEA), based in Paris, which advises major economies, approximately 15 million barrels of oil per day, plus an additional 5 million barrels of refined products, transit the Strait of Hormuz. An IEA research report warned on its website, "The sheer volume of oil exports transiting the Strait of Hormuz, combined with a near absence of alternative routes, means that any disruption affecting transit through the Strait would have major consequences."

The impact of the conflict is already being felt in fuel markets. In the UK, a major heating oil supplier stated it is managing rationed supplies to ensure fair distribution following a surge in demand. Since the conflict began, Europe's benchmark diesel price has increased by over 40%.