Iran's Hormuz leverage weakens but oil supply risks remain: Mirae Asset

Disclaimer: This article is written by Mohammed Imran, research analyst, Mirae Asset Sharekhan. Views expressed are his own. Readers' discretion is advised.

 

The past week has been volatile for the global energy markets, with Iran-backed Houthis in Yemen taking control of the coastal areas bordering the strategic Bab al-Mandeb Strait. They gained ground in their push to seize Mokha near the southern end of the Red Sea. The dated Brent is quoted at $130/bbl and futures are up almost 80 per cent this year, although the benchmark remains below its wartime peak of just above $126 a barrel reached in April. 

 

 

As Tehran’s leverage inside Hormuz becomes less decisive, the geography of pressure appears to be widening beyond Hormuz itself. Several shipping tracking companies are reporting improved oil flows from the South side of the Strait of Hormuz, which comes under Omani control. Nearly 6-9 million barrels of oil are being routed through the strait with the help of the US Navy; Saudi crude exports are trending higher after a significant pickup from the Kingdom’s Eastern terminals as exporters are gradually learning to move barrels through a disrupted Hormuz. 

 

The crude oil stored on tankers that have been stationary for at least seven days fell 23 per cent week-on-week to 76.39 million bbl in the week ended September 11, the lowest in a year. This further indicates a loosening grip of Iran, but its own exports have dropped sharply due to the US blockade. We could see Iranian aggression as the US approaches mid-term elections to pressure the US regime through higher oil prices.

 

Trump working to ease Ukraine-Russia attacks

Ukraine's intense attacks on Russian energy infrastructure have been a major factor in driving the shortages of diesel products in Europe, and a surge in crack spreads. The ICE gasoil crack remains above $80/bbl and near record levels. This suggests the market may be a bit sceptical about Trump's call for an agreement between Russia and Ukraine not to attack energy infrastructure.

 

East-West pipeline maintenance

The repair work on the Saudi’s East-West pipeline, which was damaged by a Houthi attack, could see 4 per cent of world supplies affected over 3-4 weeks. Prices are likely to remain well supported until we get clarity. The Saudis have oil in storage tanks at Yanbu, which should sustain exports for several days. The risk of port stocks running out before the pipeline resumes lingers. Some suggest the Saudis are looking to increase exports via the Strait of Hormuz amid the pipeline outage. Given the disruptions in the Strait, that may be easier said than done.

 

Global Demand and OECD inventory levels

OPEC’s latest demand outlook points to a still-expanding oil market, though growth remains uneven. The group expects world oil demand to rise by 0.4 mbpd in 2026 to 105.84 mbpd, before adding a stronger 2.4 mbpd in 2027 to reach 108.2 mbpd. This keeps the medium-term demand picture constructive, but not without downside risk from weaker macro signals.

 

Inventory data, however, show that the market has not fully loosened. OECD commercial oil inventories rose by 9.8 mb m-o-m to 2,763 mb but remain 57 mb lower y-o-y and 47.9 mb below the latest five-year average. OECD commercial crude stocks stood at 1,313 mb, down 29.2 mb y-o-y, 35.2 mb below the five-year average and 149.7 mb below the 2015–2019 average.

 

The EIA’s balances reinforce this tightness. It estimates August global demand at 103.70 mbpd against supply of 99.63 mbpd, while September demand is projected at 104.21 mbpd versus supply of 99.41 mbpd. Offline supply also increased to 11.59 mbpd in August from 9.785 mbpd in July. As a result, the EIA now sees a 2026 deficit of 1.97 mbpd, slightly wider than its earlier 1.91 mbpd estimate. For 2027, it still expects a surplus of 4.90 mbpd, suggesting that current tightness may ease if disrupted supply returns and demand growth moderates.

 

Refining capacity recovered in August

The loss of Russian refining capacity has been absorbed by higher runs from Asian refiners, which increased throughput by about 520 tb/d, m-o-m, to average 25.20 mb/d in August as refinery utilisation rates increased by 1.0 pp to average 84.47 per cent. While US continued to run at 97 per cent of capacity, the overall crack spread will still remain higher due to stronger demand.

 

Macro data signals slowdown

China domestic demand is signalling weakness as retail sales slowed to 0.4 per cent Y-o-Y in August, down from 0.6 per cent. This was the second straight month of deceleration, bringing year-to-date retail sales growth down to just 1.1 per cent Y-o-Y. China's fixed asset investment growth fell -7.2 per cent Y-o-Y through the first eight months of the year. The entire property sector remains a major drag on the economy, with investment down 19.9 per cent Y-o-Y.

 

Outlook

We believe that central banks' moves to tame inflation would likely come at the cost of an economic slowdown; however, the supply disruption will remain pertinent unless US-Iran reaches resolution through diplomacy. With the race to mid-term election, we expect Iran to put pressure on US allies through raising energy prices with gaining edge at Red sea through Houthis. We expect Brent heading for $120/barrel in October and the average Brent prices for 2026 would stay around $92/barrel. As Trump's campaign for the mid-term election intensifies, we could see news flow that could lead to a sharper correction, but that should be considered a long opportunity, as underlying supply would remain tight for at least six months.