Brent crude surged 6.99% to $100.64 a barrel on Thursday and West Texas Intermediate climbed more than 5% to $91.08 after Houthi forces attacked two Saudi oil tankers in the Red Sea. The tankers, identified as the Encelia and Layla, were struck just hours after the Houthis announced a naval blockade of Saudi shipping. The market reaction was swift, with global equities opening sharply lower and the 10-year Treasury yield reaching its highest level since January 2025. Reports indicate the attacks have fundamentally altered the risk profile for energy markets, pushing benchmarks back above triple digits for the first time since late May.
Two Chokepoints Now Compromised
The immediate trigger for the rally was an attack roughly 70 nautical miles southwest of Al Shuqaiq on Saudi Arabia’s Red Sea coast. A projectile struck the Encelia, sparking a fire that the crew was fighting, though no casualties were reported. Ship-tracking data showed the tanker broadcasting a “not under command” status, indicating it had lost the ability to manoeuvre due to damage. This event marks the first confirmed strike since the Houthi blockade was announced earlier this week, transforming a threat into demonstrated capability.
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Geography is now driving the price action, as two critical maritime arteries are simultaneously compromised. Hormuz traffic has fallen back into single digits, leaving the vital strait effectively compromised. Meanwhile, Bab el-Mandeb carries 12% to 15% of global maritime trade and is now under direct attack. The rerouting math is punitive. Avoiding Bab el-Mandeb forces vessels to go around the Cape of Good Hope or transit Suez, adding weeks of voyage time and substantial cost to every barrel.
The market context for this escalation is severe. President Trump warned that the United States would strike an Iranian bridge or power plant for every vessel attacked in the Strait of Hormuz, prompting Iran to threaten retaliation against US infrastructure. US Central Command completed a twelfth consecutive night of strikes on Iranian targets. Both sides have publicly downplayed the prospect of negotiations, leaving the outlook for peace uncertain. The outlook looks somewhat awkward for the bulls, as the combination of a degrading Hormuz and an attacked Bab el-Mandeb creates a logistical bottleneck rather than a simple production cut.
Forecast vs. Reality
A significant gap exists between the price and recent official projections. The July Short-Term Energy Outlook forecast Brent averaging $74 a barrel in the third quarter, but the benchmark is already trading at $100. That prediction assumed the Strait would reopen and that shut-in production would resume. Those specific assumptions have now broken down.
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Oil markets have already traded through their entire distribution range once this year. Brent bottomed at $58.66 on December 16, 2025, in an environment of global oversupply. The conflict in late February closed the Strait, causing OPEC+ production to fall 9.4 million barrels per day before prices rallied to a 52-week peak of $120.88 in April. The ceasefire brought prices crashing down to $70 by July 1, but the reversal has been equally violent. Brent is now $14 above its July 16 close of $84.23.
Every previous oil shock ended with producers increasing output. This time, the arithmetic on who can produce more is uncomfortable. OPEC spare crude production capacity is now expected to average 2.5 million barrels per day in 2027. This number is roughly equal to what was still moving through Hormuz at the trough of the last closure. The Strategic Petroleum Reserve facility sits at a 43-year low, stripping the government of its emergency tool. The inventory buffer used to support prices during the first closure has been consumed, leaving the market entering the second escalation with nearly a billion-barrel stock deficit.
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Impact on the Consumer
The crude price is the headline, but the refined product market is where the shock actually transmits into inflation. Crack spreads and refinery margins have hit four-year highs. Refiners prioritized jet fuel during the conflict, which constrained gasoline output. As a result, US gasoline inventories fell below the five-year range, and retail prices averaged more than $4.21 a gallon in the second quarter of 2026. Diesel prices have stayed above $5.80 a gallon.
The disconnect between crude and products means pump prices will likely rise rather than fall, despite the mid-year forecast predicting relief to $3.80 a gallon. With Brent back above $100, the pass-through to consumers is immediate. Gasoline serves as the single most politically visible economic indicator in the United States and a direct headline input for CPI. This tightness in the refining sector creates a difficult path for the Federal Reserve. The central bank must balance inflation risks against the backdrop of a geopolitical crisis in the Red Sea.
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