Global energy markets endured a week of intense volatility as the conflict in the Middle East reached its 100th day, leaving traders caught between a fragile diplomatic breakthrough in Lebanon and escalating strikes against oil infrastructure. While prices retreated from mid-week peaks, the continued closure of the Strait of Hormuz and the rapid depletion of global inventories have left the industry facing a sustained inflationary shock.
Benchmark crude prices climbed sharply in the first half of the week following new hostilities in the Persian Gulf. International market price assessments on Wednesday, June 3, showed Brent crude rising 1.9% to $97.81 a barrel, while West Texas Intermediate (WTI) gained 2.4% to reach $96.02. However, a subsequent US-brokered ceasefire agreement between Israel and Lebanon on June 4 triggered a retreat, with Brent falling to $95.03 and WTI dropping to $92.79. By the close of trading on Friday, June 5, WTI had settled at $90.54 per barrel. The impact on consumers remains stark; national average gasoline prices in the US stood at $4.22 per gallon by week’s end, representing a 43% increase since the war began, while diesel costs have surged 53% over the past year.
Geopolitical tensions were further inflamed on Wednesday when an Iranian drone strike hit Terminal 1 of Kuwait International Airport, resulting in the first known civilian fatality in a Gulf nation since the April ceasefire. On the same day, Ukrainian drones targeted an oil terminal in St. Petersburg, Russia, underscoring the vulnerability of export infrastructure during the opening of a major economic forum. These disruptions have contributed to a global production loss of approximately 14 million barrels per day compared with pre-conflict levels. In response, Kuwait Petroleum Corp.’s managing director of international marketing, Sheikh Khaled Ahmad Al-Sabah, confirmed that Gulf states are actively discussing the construction of new pipelines to bypass the Strait of Hormuz, which normally carries one-fifth of the world’s oil supply.
A significant drop in Chinese import demand has emerged as a critical variable preventing a more severe global energy crisis. According to Martijn Rats, chief commodity strategist at Morgan Stanley, China’s low imports have effectively “shielded” the rest of the market, with sea-borne arrivals to the country falling to 7.5 million barrels per day (b/d) compared with 13 million b/d a year ago. Tom Baker, a senior executive at Vitol, noted that Beijing appears to be aggressively destocking commercial inventories it accumulated when prices were lower, with drawdown rates estimated at 700,000 to 800,000 b/d. Furthermore, China has nearly suspended its own exports of refined products, with diesel and jet fuel shipments reaching a near-decade low of 300,000 b/d in April.
The outlook for the global economy remains tempered by these energy-driven inflationary pressures. The Organization for Economic Co-operation and Development (OECD) warned this week that global GDP growth is projected to slow to 2.8% this year, with inflation in G20 economies averaging 4%. Stefano Scarpetta, the OECD’s chief economist, highlighted that global oil stores dropped by more than 100 million barrels in both April and May, creating a dire situation for import-dependent Asian nations such as India and Vietnam. While some oil exporters like the United States and West African nations have stepped up production to fill gaps, the International Energy Agency has cautioned against the rapid depletion of inventories ahead of the peak summer demand season.
Looking ahead, market participants remain wary that even a formal peace deal would not provide immediate relief to supply chains. Analysts at RBC Capital Markets emphasised that restoring normal energy flows through the Strait of Hormuz will take months, as shipowners will likely demand hefty insurance premiums to return to previously contested waters. Trafigura’s chief economist, Saad Rahim, argues that the market is at an “inflection point,” having largely exhausted the buffers provided by strategic reserve releases and seasonal demand destruction. As summer approaches, the sustainability of the current price levels will depend heavily on whether the nascent ceasefire in Lebanon can be leveraged into a broader regional de-escalation.