Hormuz tightens the squeeze

XBR/USD

Key zone: 95.00 - 97.50

Buy: 98.50 (on a strong positive fundamental basis); target 102.00-103.50; StopLoss 97.50

Sell: 94.50 (on a pullback following a retest of 96.50); target 91.50-90.00; StopLoss 95.50

Flows are returning, but the market is still paying for the risk of war, the diesel shortage, and the vulnerability of the world’s main oil route. Brent remains above $100 even as Middle Eastern exports recover.

The market has received more physical barrels, but it has not received the most important thing — a guarantee of safe shipping through Hormuz. That is why the geopolitical premium has not disappeared yet.

U.S.-Iran negotiations are continuing, but there is no agreement that would guarantee the route’s sustained reopening. Tehran links the reopening of the strait to an end to the U.S. naval blockade, an easing of oil restrictions, and a ceasefire. Washington demands a resolution on the nuclear program. The positions of the two sides remain far apart.

Any political headline can send Brent down several dollars within hours, but any signal that negotiations are breaking down can bring buyers back just as quickly. As long as there is no sustainable agreement and normal shipping, the geopolitical premium remains part of the price.

There are more barrels — physical flows are indeed recovering: exports from the seven largest Middle Eastern producers reached about 16.3 million bpd in September. This is better than the extreme scenario of a complete blockade, but it is still not a return to normal logistics — the February level was about 19.5 million bpd.

• Saudi Arabia has become the main source of the supply recovery. The country’s exports in September are estimated at approximately 5.4 million bpd, compared with 2.446 million in August. Shipments from Ras Tanura increased from approximately 929,000 to 3.6 million bpd.
• Even more important is the recovery of the East-West Pipeline. Saudi Aramco resumed supplies through Yanbu after repairs, while current throughput is estimated at approximately 2.65 million bpd, with the potential for a further increase to 3–4 million.

Unfortunately, alternative routes have limited capacity, and restoring flows takes time. This is precisely where the main conflict for Brent lies: the physical deficit is shrinking, while political risk remains.

For Brent, this is a bearish factor: the more Saudi oil reaches the Red Sea bypassing Hormuz, the less the market is willing to pay specifically for the risk of the strait being blocked.

Possible restrictions on U.S. exports are becoming a separate source of risk.

U.S. diesel already costs around $6.50 per gallon, while inventories are at historically low seasonal levels. At the same time, the U.S. exports approximately 1.3 million bpd of diesel and other middle distillates.

Washington is interested in lowering domestic prices, but reducing exports could produce the opposite global effect: less U.S. fuel for Europe and Latin America → higher global diesel prices → higher crack spreads → stronger inflationary pressure. The potential effect of a complete ban is approximately $3 per barrel in higher European wholesale diesel prices for every week the restriction remains in effect — almost 2%.

It is diesel that could once again turn the oil shock into an inflationary one. Oil puts pressure on Treasuries — and through them, on equities. In September, the correlation between WTI and the 10-year Treasury yield rose to approximately 65% — the highest level since the early 1990s. In other words:

Brent up → inflation expectations up → Treasury yields up → higher discount rate → pressure on equities → support for the dollar.

Therefore, another surge in oil prices could simultaneously hit bonds and the technology sector.

And What Is the Result?

It is now dangerous to trade Brent based on headlines alone. The main signal is confirmation of a political event through physical flows.

• If shipping through Hormuz stabilizes, Saudi alternative routes continue to increase volumes, and Washington and Tehran reach an agreement, the geopolitical premium will begin to compress rapidly. In this case, the recovery in supply will become the sellers’ main argument.
• If negotiations break down, flows through Hormuz decline again, or energy infrastructure is damaged, the market will instantly return to a deficit model. Brent will receive a new upward impulse, while rising oil prices will simultaneously intensify pressure on Treasuries, the dollar, and expensive technology stocks.

As long as Hormuz remains vulnerable, selling the geopolitical premium simply because exports have recovered is premature. But buying oil solely on war-related headlines is also dangerous: if physical flows continue to increase, the market will quickly take that premium back.

So we act wisely and avoid unnecessary risks.

Profits to y’all!