This was a historic week for the energy markets. WTI crude crossed above $90 for the first time since September 2023, diesel prices surged more than 39% in a single week, and the national average price for gasoline at the pump rose 11.3%, according to AAA.

The initial catalyst for the rally was the shock of tankers being struck near the Strait of Hormuz, which brought traffic through the waterway virtually to a halt. Roughly 20 million barrels per day of oil flows typically pass through the strait, and a significant portion of those shipments are now unable to reach their final destinations.

However, the conflict has now entered a new phase. Instead of focusing solely on maritime disruption, key oil refining and LNG infrastructure has become a target of attacks by the Iranian regime, forcing some facilities to slow production or halt operations altogether. This development could ultimately have a more significant impact on energy markets than the disruption to vessel traffic alone.

Countries such as Qatar, Kuwait, and Iraq have been heavily affected by the current events. In several cases, producers are unable to export petroleum byproducts into global markets and are also unable to store excess supply because storage facilities are already operating at capacity.

This situation will be important to monitor in the coming week. The more refining and extraction operations that are shut, the more difficult it becomes to restore production. In many cases, it can take three to four weeks for these facilities to return to their pre-conflict production capacity.

Another emerging issue is the rerouting of oil and LNG tankers to alternative destinations, which is beginning to create logistical mismatches in global shipping routes. Even after tensions eventually cool, these disruptions could keep daily tanker rates elevated, contributing to a continued severe backwardation in crude oil markets—a situation where spot prices remain significantly higher than futures prices.

The Trump administration has announced several measures intended to help mitigate rising fuel prices. These include providing maritime insurance for tankers transiting the Strait of Hormuz, granting India a temporary 30-day waiver to purchase Russian oil, and potentially taking steps to intervene in futures markets in an attempt to dampen price volatility. Critics have noted that India likely would have continued purchasing Russian crude regardless of the waiver.

As the situation evolves, markets will inevitably adapt. Historically, once oil prices reach a sufficiently elevated level, the marginal impact of geopolitical headlines on market volatility begins to diminish, similar to patterns seen during previous military conflicts. For now, however, energy markets remain overwhelmingly driven by developments and warrants caution for traders.

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