Crude oil prices have surged over the past three weeks, with Brent climbing from this month’s low of $70 to $100 on Thursday, while West Texas Intermediate (WTI) jumped from $67.20 to $93.50 over the same period. This rally comes against a backdrop of intensifying geopolitical instability, including an escalated US-Iran conflict and renewed violence in the Russia-Ukraine war. However, despite these supply risks, strategists note that oil prices remain in a bear market, having fallen by over 20% from their highest levels this year, suggesting that fundamental supply factors are currently outweighing geopolitical premiums.

The divergence between price action and geopolitical severity is largely attributed to increased global supply and weakening demand from key importers. The United States has boosted its oil production to 13.8 million barrels per day, taking advantage of higher prices to maximize output. Concurrently, strategic reserve releases have added significant liquidity to the market. The US government has released over 104 million barrels from its reserves, with authorization to release up to 172 million barrels, while global pledges exceed 400 million barrels.

Key Market Metrics

Demand-side pressures are further dampening price potential, particularly from China, the world’s largest oil importer. In June, China imported approximately 6.4 million barrels of oil per day, marking the lowest level since October 2016 and representing a 41% year-on-year decrease. This slowdown in Chinese demand contrasts sharply with supply disruptions caused by Houthi attacks on shipping in the Bab el-Mandeb Strait and Ukrainian strikes on Russian refineries, which have forced fuel rationing in some Russian provinces.

What the Numbers Show

The market data reveals a structural decoupling between geopolitical risk premiums and actual supply-demand fundamentals. While inventories have dropped significantly—with US Strategic Petroleum Reserves dwindling to their lowest level since the 1980s—the surge in US production and massive strategic releases have effectively neutralized immediate supply shocks. Furthermore, trader sentiment appears to be pricing in a potential diplomatic resolution between the US and Iran, anticipating that Gulf state pressure may lead to a deal that would stabilize prices, similar to previous memorandum of understanding agreements.

Geopolitical tensions remain a critical variable. Iranian leaders have rejected a ceasefire proposal delivered by Iraq’s prime minister, citing confidence in withstanding US attacks amid political challenges for President Donald Trump. Meanwhile, traffic through the Strait of Hormuz faces continued risk as the US-Iran war shows no end in sight. Until diplomatic channels yield a concrete agreement or demand rebounds from major economies like China, oil prices are likely to remain constrained by the current surplus of available supply despite the elevated risk environment.

The Saudi-led coalition in Yemen struck Houthi targets on Saturday in response to missile attacks by the Iranian-backed group, triggering immediate volatility in global energy markets. Brent crude closed on Friday at $96.78 a barrel, having soared about 27% in the past two weeks as US-Iran skirmishes worsened and instability extended to the Red Sea. This escalation underscores how quickly the conflict is widening, with the Houthis opening a second front in the US-Iran war by announcing a blockade of shipping routes through the Red Sea.

The Joint Forces Command of the Coalition, supporting Yemen’s internationally recognized government, stated its forces hit "legitimate military targets" used by the Houthis to threaten commercial vessels. The Yemeni government air force also carried out strikes on Houthi missile and drone launch sites. Saudi authorities announced warnings for Jazan and Yanbu early Saturday morning, asking people to seek shelter, but later lifted the warnings stating the danger had passed.

Energy Market Impact

Crude prices continue to spiral upward, temporarily breaking back above $100/bbl as the Iran War escalated and the Houthis more directly joined the conflict with a maritime blockade on Saudi Arabia, according to Rory Johnston, an oil market researcher. Any disruption to Saudi Arabia’s Red Sea export routes would likely push up oil prices even more. The US Energy Information Administration (EIA) stated that 12% of world oil shipments used to transit through the Bab El-Mandeb Strait, a critical 100-kilometer waterway separating Yemen from Djibouti and Eritrea.

Shipping Disruptions

The blockade has begun to affect shipping through the region’s chokepoints. Windward, a maritime intelligence company, reported that a Greece-flagged VLCC signaling "Suez for orders" stopped short of the Gulf of Aden on Wednesday and appears to be diverting away after a 12-hour pause. That is one of six tanker diversions Windward has tracked in two days. A Hong Kong-flagged supertanker bound for Yanbu made a U-turn, Bloomberg News reported on Saturday.

Bab el-Mandeb recorded 49 confirmed crossings on Friday, including five sanctioned vessels, 11 shadow-fleet vessels, and four dark transits, according to Maritime Traffic. Several ships that had previously reversed course later completed their passages. The security posture shifted following the confirmed Houthi attack on a Saudi-flagged tanker on Wednesday, which the Joint Maritime Information Center (JMIC) said demonstrated a renewed willingness and capability by Houthi forces to target specified merchant shipping.

Geopolitical Escalation

The Houthis claimed to have struck Saudi Arabia with missiles on Saturday morning, deepening their involvement in the Middle East war. Military spokesman Yahya Saree said the Houthis launched two "sensitive operations" against Saudi Arabia and that the principle of a "blockade for a blockade" will continue. The militia targeted Jazan, home to an oil refinery with a capacity of 400,000 barrels a day, and Yanbu, a strategic port where Saudi exports approximately tripled to a record high of around 4 million barrels a day in the spring before falling back slightly.

On Thursday, US President Donald Trump said he would hold Iran responsible for further attacks by the Houthis, calling them a surrogate or proxy of Iran. The Saudi-led coalition denied reports that it had targeted Hodeidah Port, stating all Yemeni ports remain open to maritime navigation. Iran remains the main funder and sponsor of the Houthis, adding another layer of geopolitical risk to a conflict already reshaping regional energy security.