Markets moved quickly this week as a cascade of disruptions reduced crude flows from the Gulf and pushed prices sharply higher. Saudi authorities have started cutting output, two industry sources said, making the kingdom the latest producer to be affected by the U.S. and Israeli war on Iran. The fighting has virtually halted ship traffic in the region and helped lift oil prices nearly 30% to $119 a barrel on Monday.
Saudi oil major Aramco has begun reducing production at two of its oilfields, two sources told reporters, although the company declined to comment further. The hit to supply has been compounded by other regional incidents and decisions. In Bahrain, Bapco Energies declared force majeure after an attack on its refinery complex. Over the weekend, Iraq cut output at its main southern oilfields by 70% to 1.3 million barrels per day (bpd), according to three industry sources. Kuwait Petroleum Corp began cutting output on Saturday and declared force majeure as well.
The result for prices has been dramatic. At one point crude surged by about 30% and benchmarks reached their strongest levels since mid-2022. At 1156 GMT, benchmark Brent crude futures stood 12% higher at $103.93 per barrel, while U.S. West Texas Intermediate (WTI) was up 12.5% at $102.31.
"Oil prices have now gathered all the ingredients for a perfect storm - Middle East Gulf producers cutting output, the prolonged closure of the Strait of Hormuz ... all compounded by a growing pessimism about a quick turnaround in the current situation," said Muyu Xu, senior oil analyst at Kpler, underscoring the combination of supply reductions and constrained shipping that markets are pricing in.
Shipping routes have been directly affected. Saudi Arabia is diverting crude exports by pipeline to the Red Sea, while threats from Tehran have left traffic into and out of the Gulf at an almost complete standstill. Hundreds of tankers remain idle inside the Gulf and just outside its southern approach at the Strait of Hormuz.
The disruption has prompted urgent talks among policy makers. A Group of Seven meeting of finance ministers on Monday will discuss the possibility of a joint release of emergency oil reserves, a French government source said. At home, U.S. political leaders have weighed in on possible use of strategic stocks: President Donald Trump, who returned to power this year pledging to deliver cheaper energy costs for Americans, sought to downplay concerns about rising U.S. gasoline prices, which were up 11% on the week on Friday. Senate Minority Leader Chuck Schumer urged the president to sell oil from the Strategic Petroleum Reserve.
In Asia, officials and companies have also prepared contingency measures. Japan, which imports about 95% of its oil from the Middle East, instructed a national oil reserve storage site to prepare for a potential crude release, a senior member of parliament said, though the chief cabinet secretary later said no decision had been made. China has asked refiners to halt fuel exports and to attempt to cancel shipments that were already committed. Vietnam removed import tariffs on fuels, and Bangladesh closed universities to conserve electricity and fuel. Qatari authorities halted exports of liquefied natural gas, and Qatar's Energy Minister Saad al-Kaabi told the Financial Times that even if the U.S. were to deploy warships to the Strait of Hormuz, the route would remain "too dangerous."
Governments are also moving to blunt the inflationary effects of the energy shock. South Korea's President Lee Jae Myung announced the country's first fuel price caps in nearly 30 years. These steps reflect growing concern about the economic impact of sharply higher energy costs.
With multiple producers reducing flows, shipping severely constrained, and officials considering emergency reserve releases, the near-term outlook for prompt physical supply remains tight. Market participants and policy makers face competing pressures: to calm prices for consumers while managing the operational and security challenges that have curtailed exports across the Gulf.
Key points
- Saudi Arabia has started cutting oil output and Aramco has reduced production at two oilfields, according to two sources; the company declined to comment.
- Regional supply disruptions include force majeure declarations at Bahrain's Bapco Energies and Kuwait Petroleum Corp, and a 70% cut in output at Iraq's main southern oilfields to 1.3 million bpd.
- Shipping has been severely disrupted, with hundreds of tankers idle inside the Gulf and near the Strait of Hormuz, while Saudi Arabia diverts crude exports via pipeline to the Red Sea.
Risks and uncertainties
- Continued closure or restricted use of the Strait of Hormuz could prolong disruptions to crude flows and keep global supplies tight, affecting energy and transportation sectors.
- Further attacks or operational damage to refinery and export infrastructure may lead to additional force majeure declarations, increasing volatility for refining margins and consumer fuel prices.
- Policy responses such as coordinated releases from strategic reserves or export restrictions can influence market balances but also introduce uncertainty for refining, shipping, and downstream fuel markets.