Oil Prices Plunge 10% as Hormuz Supply Risks Persist

Key Takeaways

• Brent crude fell below $87 while WTI moved towards $81 as traders reduced the geopolitical risk premium linked to the US-Iran conflict.
• The decline reflects stronger expectations of diplomatic progress rather than a full recovery in oil shipments through the Strait of Hormuz.
• Limited vessel traffic, high insurance costs and security threats in the Red Sea leave oil prices vulnerable to another sharp reversal.

Oil Prices Extend Their Two-Session Decline

Oil prices continued falling on Tuesday, July 28, as hopes of diplomatic progress between the United States and Iran encouraged traders to unwind positions built around the risk of a wider Middle East conflict.

Brent crude futures dropped nearly 2% to $86.61 per barrel during Tuesday trading, reaching their lowest level since July 17. West Texas Intermediate fell around 1.5% to $81.35, its weakest level since July 20.

The move followed an even steeper decline during the previous session. Brent settled at $88.36 per barrel after losing 8.7%, while WTI closed 7.5% lower at $82.61. Together, the declines erased roughly 10% from the two benchmarks in two sessions.

Brent had climbed above $100 during the previous week as renewed US-Iran attacks threatened shipping around the Strait of Hormuz and the Red Sea. The latest reversal shows how quickly geopolitical premiums can disappear when the probability of military escalation falls.

However, lower futures prices do not mean that the physical oil market has returned to normal. Shipping activity through Hormuz remains severely restricted, while security risks have spread to other important energy routes.

US-Iran Talks Remove Part of the War Premium

The sell-off accelerated after Washington paused strikes against Iran following nearly two weeks of renewed attacks. Tehran signalled that it would limit retaliation while the pause remained in place, creating space for negotiations.

US President Donald Trump said talks with Iran were making progress and that an agreement remained possible. However, he warned that military action could restart if negotiations failed. Iranian officials have also left open the possibility of further retaliation.

Oil futures respond to changes in probability before any formal agreement is signed. Traders are therefore pricing in a higher chance that negotiations could reduce the danger to Gulf energy infrastructure and allow more vessels to pass through Hormuz.

Oman has also presented Iran with a proposal for a joint regional mechanism to manage the strait. The plan would use voluntary shipping fees to support navigation safety, environmental protection and search-and-rescue operations. Regional participation could reduce concerns that control of the waterway rests with a single country.

The proposal remains at an early stage, and there is no guarantee that it will produce a lasting agreement. Nevertheless, its emergence has strengthened expectations that regional diplomacy could gradually restore shipping.

Hormuz Oil Traffic Remains Far Below Normal

The physical market presents a more cautious picture than the sharp decline in oil futures suggests.

Net crude oil and refined-product exports through Hormuz averaged around 2.9 million barrels per day in the week ending July 24, down from 5.9 million barrels per day one week earlier. Both figures remain far below the volumes that passed through the waterway before the conflict.

In 2025, Hormuz handled close to 20 million barrels per day of crude oil and refined products, representing roughly 25% of global seaborne oil trade. Around 80% of those shipments were destined for Asian markets, making China, India, Japan and South Korea particularly sensitive to disruptions.

Only six commodity-carrying vessels passed through Hormuz on Monday, after seven vessels made the journey on Sunday. These numbers indicate that shipowners remain reluctant to increase traffic despite the pause in military operations.

Restoring shipments involves more than ending airstrikes. Tanker operators need assurances about vessel safety, while insurers must be willing to offer war-risk coverage at commercially acceptable prices. Refineries also need confidence that cargoes will arrive on schedule before rebuilding their supply programmes.

Alternative routes offer only limited relief. Saudi Arabia and the UAE have pipelines capable of bypassing Hormuz, but their estimated available capacity of 3.5 million to 5.5 million barrels per day cannot replace the volumes normally transported through the strait. Other Gulf exporters remain heavily dependent on the waterway.

Red Sea Risks Complicate the Oil Price Outlook

Security concerns have also moved beyond Hormuz. Attacks and threats around the Red Sea have increased the danger facing vessels using the Bab el-Mandeb strait, another important route connecting Middle Eastern energy exports with Asian and European markets.

Bab el-Mandeb traffic increased to 28 vessels on Monday, a four-day high, but remained below the July peak of 46 vessels. The recovery therefore points to cautious improvement rather than a complete normalisation of trade.

Further uncertainty emerged after Saudi Arabia reported intercepting drones aimed at petroleum targets. Yemen’s Houthis also claimed to have targeted the East-West Pipeline, which carries Saudi oil to the Red Sea port of Yanbu.

That pipeline has become more strategically important because it allows Saudi Arabia to redirect some exports away from Hormuz. A sustained threat to Yanbu or the East-West Pipeline would weaken one of the region’s most important alternative supply routes.

Some refiners are already adapting to these risks. India’s Mangalore Refinery and Petrochemicals instructed suppliers involved in a spot tender to avoid both Hormuz and the Red Sea when delivering up to one million barrels of crude. Such requirements can increase journey times, freight costs and competition for oil from alternative suppliers.

Has the Market Priced Out Hormuz Risk Too Early?

The 10% fall in oil prices does not necessarily mean traders believe the Hormuz threat has disappeared. Instead, the market is assigning a lower probability to the most disruptive outcome: renewed fighting followed by another near-closure of regional shipping routes.

Further downside is possible if the US-Iran talks produce a durable agreement, vessel movements recover and insurers restore broader coverage. Brent could move towards $80 if Hormuz fully reopens and Gulf exports continue increasing.

Demand conditions may also limit another sustained price surge. Earlier gains above $100 raised concerns about inflation and weaker economic growth, particularly in energy-importing Asian economies. Global oil demand is projected to decline by around one million barrels per day in 2026 before recovering in 2027.

However, the downside case depends heavily on diplomacy. A breakdown in negotiations, another attack on tankers or damage to Gulf export infrastructure could quickly restore the geopolitical premium removed over the past two sessions.

The gap between futures prices and physical shipping conditions therefore remains important. Financial traders can close risk positions within minutes, but restoring tankers, insurance capacity and refinery supply chains may take weeks. Until Hormuz traffic shows a sustained recovery, the oil market remains exposed to sudden and potentially severe price swings.