Oil prices fall after volatile week, but the real squeeze may still be ahead

Oil prices fell on Friday as signs of improving tanker traffic through key Middle East waterways encouraged traders to lock in profits after a volatile week.

Brent crude dropped $1.03, or 1.2%, to $88 a barrel by 0215 GMT, while West Texas Intermediate declined $1.50, or 1.8%, to $82.09.

Even after the pullback, both benchmarks were heading for monthly gains of about 20%, reflecting the war premium built into crude since regional fighting intensified.

The market is now balancing better physical flows against a conflict that continues to threaten the Strait of Hormuz, the Red Sea and the Suez-linked export network.

Hormuz flows cool the immediate panic

The decline was driven less by an improvement in diplomacy than by evidence that some cargoes are moving again.

A QatarEnergy-controlled liquefied natural gas tanker left the Strait of Hormuz on Wednesday, the first recorded exit by such a vessel since July 11.

Twelve commodity ships crossed the waterway that day, although activity remained below normal.

Analysts noted that traders were weighing higher regional tension against the gradual recovery in Hormuz flows. That explains why prices have retreated without losing the broader risk premium.

The improvement is also uneven. Vessel traffic through Bab el-Mandeb increased on Thursday, but threats from Iran-aligned Houthi forces have forced some Saudi exports to use longer or less transparent routes.

A drone strike that damaged gas vessels at Egypt’s Damietta port added a security concern near the Suez Canal.

Phillip Nova analyst Priyanka Sachdeva said rising freight and insurance costs show that physical trade remains far from normal, even when transit numbers improve.

Tight US inventories keep the floor firm

The Friday sell-off came despite a stronger-than-expected draw in US crude stocks.

Commercial inventories fell 7.2 million barrels in the week ended July 24 to 404.5 million barrels, around 7% below the five-year seasonal average, according to the Energy Information Administration.

Refineries operated at 97.2% of capacity and processed 17.3 million barrels a day, while crude imports declined.

That combination points to a tight prompt market after months of disrupted international supply.

The figures limit the bearish case from higher tanker traffic. More barrels may be moving through chokepoints, but US refiners are running hard and domestic stockpiles offer a thinner cushion against another outage.

EIA data also show that second-quarter global inventories fell rapidly as Hormuz disruptions pushed buyers towards alternative sources.

OPEC+ faces a harder supply decision

Attention now turns to the August 2 meeting of seven OPEC+ producers.

The group is expected to approve a September output increase of about 188,000 barrels a day, completing the phased reversal of 1.65 million barrels a day of voluntary cuts introduced in 2023.

The increase may be followed by a three-month pause from October.

Roughly 2 million barrels a day of broader OPEC+ curbs would still remain, while actual exports from some Middle East members have been constrained by the conflict.

UBS analyst Giovanni Staunovo said the alliance’s next steps will depend heavily on how the war evolves and on its review of members’ sustainable production capacity.

That makes the scheduled increase less bearish than it appears because additional quotas do not guarantee that every barrel can reach buyers.

Oil is ending July in an unstable middle ground.

Better shipping flows have reduced the immediate fear of a severe shortage, but depleted inventories, high transport costs and multiple regional flashpoints are preventing a full unwinding of the geopolitical premium.