Oil jumps as fragile Iran ceasefire unravels

Key Points:

• Brent has jumped more than 9% since Monday to near USD 79 as renewed US-Iran tensions revive concerns about supply and shipping through the Strait of Hormuz.
• US strikes on Iran, attacks on commercial vessels and President Trump’s comment that the “Iran ceasefire is over I think” have raised the risk of a broader breakdown in negotiations.
• Managed money Brent length has fallen 87% from its March peak, while gross shorts remain near record levels, leaving the market vulnerable to further short covering.
• The Brent prompt spread has swung from a recent 40-cent contango to around 60 cents of backwardation, highlighting a shift from surplus concerns towards near-term supply risk.
  

Brent crude has jumped more than 9% since Monday, rising back towards USD 79 per barrel as renewed US-Iran tensions revive supply concerns and force a rethink among hedge funds that had recently cut bullish exposure to near-historic lows.

The latest rally followed US strikes on targets in Iran and Washington’s decision to revoke a waiver allowing new sales of Iranian oil, in response to attacks on commercial shipping in the Strait of Hormuz. The escalation threatens fragile negotiations aimed at securing a permanent peace, with both sides accusing the other of violating the ceasefire. Three commercial vessels were attacked in the Strait over the past day, the most since the agreement took effect, with the US blaming Iran for the strikes. Adding to the uncertainty, President Trump said, “Iran ceasefire is over I think”, a comment that further strengthened crude prices.

The move marks a sharp reversal from last week, when Brent briefly traded near USD 70 as the market focused on the reopening of regional supply routes and the prospect of a growing surplus of barrels from the Persian Gulf. Before the latest escalation, competition among regional producers to reclaim clients and lost market share had continued to intensify. A small mountain of barrels had been piling up inside the Gulf, increasing the need to move volumes quickly to free storage capacity and allow production to resume or increase.

It increasingly resembled a seasonal sale, with producers cutting prices to clear the shelves and make room for the next collection. Saudi Arabia’s recent price cut sent a clear message of intent: the region was back in a race for market share. This was particularly significant given the UAE’s departure from OPEC and its recent announcement that production was close to record levels.

That underlying supply challenge has not disappeared, but the latest escalation has interrupted it. The market is again being forced to price the risk that renewed attacks on shipping, or a broader breakdown in US-Iran relations, could slow the normalisation of flows through the Strait of Hormuz. As one of the world’s most important energy chokepoints, even limited disruption can have an outsized impact on prompt pricing, freight costs and market sentiment.

Positioning may now amplify the move. In the latest COT reporting week to 30 June, managed money accounts cut their Brent net long by 38% to just 55.6k contracts, down around 87% from the March peak of 429k. With gross shorts hovering near an all-time high, the long-short ratio had slumped to just 1.2 longs per short, also near a historic low. Such extremes have in the past proved difficult to sustain when the fundamental or geopolitical narrative suddenly changes.

With Brent now trading near USD 79, additional short covering may drive further near-term gains, particularly if security conditions deteriorate or the ceasefire formally collapses. The forward curve is sending a similar signal, with the Brent prompt spread surging back into a backwardation of around 60 cents per barrel from a recent 40-cent contango. For now, this highlights a market once again being driven by supply-risk concerns and position adjustments rather than surplus fears.

Refined products continue to show relative strength. Gasoline, diesel and jet fuel prices remain elevated relative to crude, supported by tight supply and peak seasonal demand. As a result, consumers around the world have yet to feel the full benefit of the earlier crude-price decline, while the latest rebound risks delaying that relief further. Persistently firm product prices could also complicate the inflation outlook if crude continues higher.

Beyond the immediate geopolitical risk, China remains a key swing factor. Chinese imports fell sharply during the war, and the response from refiners and state buyers to lower prices will help determine whether the Gulf’s accumulated barrels can be absorbed without renewed downward pressure. China has increasingly acted as a price stabiliser in recent years, buying into storage when prices were low and reducing purchases when prices spiked.

Looking ahead, Beijing is likely to proceed carefully, seeking to rebuild strategic and commercial inventories without triggering a China-driven price spike. Once the initial Gulf stock clearance has run its course, some moderation in regional competition may emerge, not least to prevent a deeper slump below USD 70, from where prices could struggle to recover.

For now, however, the focus has shifted back to Hormuz, the durability of the ceasefire and the risk that wrong-footed short positioning, combined with thin summer holiday liquidity, could amplify both prices and volatility.