Crude oil prices have surged sharply over the past month amid the ongoing West Asia war, but this time the move is being driven less by demand and supply data and more by rising geopolitical tensions.
At the centre of the rally is the Strait of Hormuz, one of the world’s most critical oil transit routes. Disruptions in this region have raised concerns over supply, pushing markets to price in risk even before any full-scale shortage has materialised.
Brent crude is holding near $110 per barrel, while US benchmark WTI is close to $112, after a strong rally last week. The sharp move reflects growing uncertainty around energy flows and how long disruptions could persist.
Justin Khoo, Senior Market Analyst for APAC at VT Markets, said the market is now being driven by geopolitical developments rather than fundamentals.
“Crude is no longer trading purely on macro fundamentals but is instead being dictated by geopolitical timelines and headline risk,” he said.
According to him, the scale of disruption is significant. “Flows through the Strait of Hormuz remain deeply constrained, reportedly operating at less than 10% of pre-conflict levels,” he noted, citing estimates from the International Energy Agency.
Oil markets typically respond to demand trends, inventory levels and production decisions. But the current situation is different.
Instead of reacting to economic data, prices are moving on uncertainty. Traders are factoring in the possibility of prolonged disruption, which has led to a steady build-up of a geopolitical risk premium.
Khoo said markets are effectively pricing in a worst-case scenario. “The market is pricing in a structural disruption scenario, with limited visibility on when stable and insurable energy flows can resume,” he said.
WHAT NEXT?
The outlook remains uncertain and largely dependent on how the situation evolves in the coming days.
There are emerging expectations in the market that a ceasefire or partial reopening of the Strait of Hormuz could ease supply concerns and bring prices down, but there is no concrete clarity yet on timing or execution.
Any signs of de-escalation could quickly reverse the trend. “Any credible de-escalation or confirmed resumption of tanker traffic through Hormuz could trigger a sharp downside correction in crude,” Khoo said.
However, risks remain tilted to the upside. “With no clear ceasefire framework in place, the directional bias remains skewed higher,” he added, warning that any escalation involving energy infrastructure could push prices up further.
The impact of rising oil prices goes beyond energy markets. Higher crude prices can push up fuel costs, feed into inflation and add pressure on economies that rely heavily on imports.
For India, which depends significantly on imported crude, sustained high prices could have implications for inflation and the trade balance.
For now, oil is reacting more to headlines than fundamentals. In Khoo’s words, “oil has effectively become the primary transmission channel for geopolitical risk,” making prices highly sensitive to every development in the region.
