Collapse of the Memorandum of Understanding sees a resumption of the Iran-U.S. war.
The collapse of the Memorandum of Understanding (MoU) between Iran and the U.S.—and the resumption of hostilities—carries serious implications for a global oil market that had priced in an end to major conflict and a gradual return to business as usual in the Middle East Gulf.
Prices have already risen sharply. When President Trump signed the MoU on 17 June at the magnificent Palace of Versailles, oil prices retreated: by early July, Brent crude was trading only slightly above $70 a barrel—roughly its level just before the war began at the end of February. That decline reflected market confidence that the worst disruption from the closure of the Strait of Hormuz (SoH) was behind us.
Since the conflict started, oil prices have remained far lower than many early forecasts anticipated. The industry largely expected a short-lived war that would avoid the most severe supply disruptions. Even as fighting dragged on, regular peace talks sustained hopes of a resolution and helped limit upward pressure on prices.
The interruption to oil supplies normally flowing through the SoH—close to 20 million barrels per day (mb/d) —was the most significant challenge that the oil industry has faced in half a century. The industry depends on continuous flows, from production through shipping and refining to the end consumer. Confronted with an unprecedented disruption in a 104 mb/d market, companies and traders worked to offset the losses and keep as much supply moving as possible. Four main offsets limited the damage:
- Some countries, notably Saudi Arabia and the UAE, bypassed the SoH by redirecting oil through existing pipelines to under-utilized alternative export terminals.
- China, the world’s largest importer, suddenly cut off from more than 5 mb/d of Middle East crude, drew heavily on its vast stockpiles—estimated at around 1.5 billion barrels—rather than competing for barrels from elsewhere and driving prices higher.
- Commercial inventories were drawn down, while the 32 member countries of the International Energy Agency (IEA) coordinated the release of more than 400 million barrels from their strategic stockpiles.
- Reduced availability and higher prices caused global oil demand in the second quarter of 2026 to fall by nearly 5 mb/d year-on-year, according to IEA data.
Taken together, these four offsets compensated for roughly half the oil that would normally have passed through the SoH.
Optimism that peace might take hold, culminating in the signing of the MoU, saw a brief surge in oil volumes through the SoH, in June and early July, averaging about 2 mb/d. The resumption of hostilities has seen traffic fall to almost zero. Brent crude is now trading close to $100 a barrel, with the potential to move higher.
If the renewed Middle East Gulf hostilities escalate further, only limited buffers remain to offset the lack of supply through the SoH. The market is in a very dangerous situation.
Problems could be compounded by the return of the Houthis.
Alongside the collapse of the MoU, a new and dangerous factor has emerged with the return of the Yemeni Houthis. After a period of inactivity, the Iran-backed group resumed threats against shipping in the Red Sea, specifically against oil tankers leaving Saudi Arabia’s port of Yanbu, a major alternative outlet for oil exports via the Bab-el-Mandeb strait. Before the war, exports from Yanbu were about 1.1 mb/d; since the disruption to the SoH they have exceeded 3.6 mb/d.
Already we’ve seen reports of ships that entered the Red Sea from the Suez Canal turning around, judging the risk to be too high. the Houthis do not need to hit many vessels. Even limited attacks will likely persuade ship operators that the risk is unacceptable. Ships can avoid the Red Sea entirely and sail around Africa, but this adds substantial time and cost to voyages. Saudi tankers anchored in the Red Sea do not have this option.
The outlook is therefore bleak, and if fighting between the U.S. and Iran continues for any length of time before another ceasefire is announced, and if the Houthis, acting effectively on Iran’s behalf, damage Saudi assets, the oil market faces a return to the deepest cuts seen so far, augmented by the loss of more than 3 mb/d of Red Sea exports.
Hormuz and Houthi risks are now compounded by fallout from the Ukraine-Russia war.
This year, Ukraine has sharply intensified its drone attacks on Russian energy infrastructure, achieving significant success in targeting pipelines, refineries, and storage facilities. Kazakhstan normally exports more than 1 mb/d of oil through the Caspian Pipeline Consortium (CPC) system to the Russian Black Sea port of Novorossiysk from where it is exported to global markets. Ukrainian drone strikes have disrupted tanker loadings at the CPC terminal to such an extent that Kazakhstan has suspended CPC operations and is currently unable to export crude via the Black Sea. Even if normal CPC operations resume, an ever-present risk remains.
The worst may yet be to come for oil prices.
Today’s actual and potential disruptions to oil industry operations are unprecedented in recent history. So it is reasonable to conclude that the sky’s the limit for crude oil prices. Where might that limit might—$150 a barrel? $200 a barrel? It is impossible to forecast a price with confidence. Consumers are already paying higher prices: the average U.S. retail price for gasoline reached $4 a gallon in the third week of July and is close to $5 a gallon on the West Coast. Of equal importance is the soaring price of diesel, which is the energy workhorse of the global economy. In the U.S., average diesel prices are already well above $5 a gallon and above $6 a gallon on the West Coast.
For the oil market, the worst may yet be to come, with all that means for the health of the global economy.
Neil Atkinson is a Senior Fellow at the National Center for Energy Analytics, Washington DC; the former Head of the Oil Division at the International Energy Agency; and a former analyst with Petroleos de Venezuela S.A. He is based in Paris.
This article was originally published by RealClearEnergy and made available via RealClearWire.
