The Iran–US–Israel Conflict: Oil Routes, Refineries and the Six-Month Outlook

By Prowess Investment TeamInvestment, Economics, Finance

Current Conflict Dynamics

On 28 February 2026, the United States and Israel launched joint strikes on Iran, killing Supreme Leader Ali Khamenei and targeting nuclear and military infrastructure, after Tehran refused US demands to end uranium enrichment. Iran retaliated with missile and drone strikes on Israel, US bases, and Gulf states, and imposed a de facto closure of the Strait of Hormuz. A Pakistan-mediated ceasefire on 7–8 April 2026 paused large-scale fighting, and a 14 June Memorandum of Understanding (MOU) set out a path to reopen Hormuz and end hostilities in Lebanon within 60 days. Both sides have since repeatedly accused each other of violating the truce: Iran struck three commercial vessels in July for bypassing its preferred shipping route, prompting a renewed US naval blockade, and as of late August 2026 the Strait remained largely closed nearly six months after the war began. President Trump has oscillated between imminent-strike threats and stand-downs at least half a dozen times, recently threatening to bomb Oman if it ‘gets in the way’ of reopening the Strait, before again citing ‘productive’ talks. On 25 August, US Treasury Secretary Scott Bessent unveiled an ‘economic D-Day’ sanctions package targeting Iran’s oil-smuggling networks, while Iran and Oman simultaneously outlined a proposed joint temporary navigational corridor through the Strait, a sign of parallel-track pressure and diplomacy that has defined the conflict’s second phase.

Israel’s Role

Israel, not just the United States, has driven the campaign’s scope and duration, with Israeli Prime Minister Benjamin Netanyahu viewed by many as critical in persuading the Trump administration to launch the February strikes. RAND analysts argue Israel’s post-October 2023 doctrine now treats any residual Iranian nuclear, chemical or biological capability as an existential threat that justifies pre-emption over deterrence, a position reinforced by Israel’s own Institute for National Security Studies (INSS), which insists on the complete dismantling of Iran’s enrichment infrastructure as a precondition for ending the war. With Israeli elections looming, many think Netanyahu has tied his political survival to the Iran file; Al Jazeera reporting notes his hard-right coalition partners opposed the April ceasefire and have pushed for a more decisive campaign, meaning Israeli strikes could resume even where Washington prefers restraint, a persistent source of escalation risk distinct from the bilateral US-Iran track.

Impact on Oil Supply Routes

The Strait of Hormuz carries roughly one-fifth of global oil supply and about a third of global liquified natural gas (LNG). Iran’s effective closure since March 2026 constitutes what the International Energy Agency has called the largest supply disruption in the history of the oil market, with Gulf output shut in by as much as 8.3 million barrels per day (mb/d) as of mid-2026. Shipping majors including Maersk, MSC, Hapag-Lloyd and CMA CGM suspended Gulf transits and rerouted around the Cape of Good Hope, adding 10–14 days per voyage at an estimated $40–50 million in extra weekly fleet costs, according to tracking by militaryspend.org. War-risk insurance for the Hormuz transit rose to roughly four times its five-year pre-conflict average, per Nautilus Shipping’s assessment. Alternative land routes offer only partial offsetting capacity, leaving a substantial structural supply gap that has driven global prices.

Impact on Refineries Globally

Inside Iran, the industrial base is tightly clustered along the northern Gulf coast: Kharg Island handles roughly 90–96% of Iran’s crude exports (about 1.5 mb/d), with the Abadan, Lavan and Bandar Abbas refineries and the giant South Pars gas condensate refinery sitting nearby, per Iran Open Data and Kpler’s mapping. This concentration makes Iran’s entire export system vulnerable to a single strike, a risk PBS News and Mansfield Energy both note Washington has so far deliberately avoided triggering. In China, the world’s largest refiner, independent ‘teapot’ refiners in Shandong province, responsible for the bulk of discounted Iranian crude processing, have been directly targeted by US Treasury sanctions; OFAC designated at least five teapot refineries and dozens of shipping firms in 2026, and the China Data Portal estimates Chinese buyers lost the customary $5–15/barrel discount on Iranian crude as a result. India’s refiners resumed tentative purchases of Iranian oil after a temporary US sanctions waiver in March 2026, per Asharq Al-Awsat reporting, while Bahrain’s Sitra refinery was knocked offline by a missile strike and Israel ordered Chevron to shut the Mediterranean’s largest gas field, curtailing Egyptian fertiliser and industrial gas supply. In the United States and Europe, the constraint has shifted downstream from crude to refined products: the IEA’s August 2026 Oil Market Report shows global refinery throughput nearly 5 mb/d below year-earlier levels even as crude supply partially recovered, and Atlantic Basin refining margins hit record highs as diesel cracks spiked. The US diesel crack reportedly touched $102/barrel in mid-August even as crude fell, per Eastern Herald’s market coverage.

Future Oil Supply

OPEC+’s eight core members (Saudi Arabia, Russia, UAE, Kazakhstan, Kuwait, Iraq, Algeria, Oman) have incrementally raised quotas throughout the conflict, but real spare capacity is concentrated almost entirely in Saudi Arabia and the UAE, producers whose own Gulf exports are constrained by the same Strait closure, as CNBC and Al Jazeera reporting on OPEC+ meetings both note. The IEA’s August 2026 Oil Market Report projects global oil supply will fall by 4.3 mb/d on average in 2026 to 102 mb/d, before rebounding 8.3 mb/d in 2027 to 110.3 mb/d, with the 2026 global balance showing a third-quarter deficit of 1.8 mb/d, more than double the prior month’s estimate, as renewed hostilities in July and August cut projected quarterly supply by a further 1.7 mb/d. Global observed inventories fell below 7.9 billion barrels in July 2026, their lowest since April 2025, even after roughly 400 million barrels were released from IEA members’ strategic reserves earlier in the crisis.

Oil Price Scenarios

Brent crude has been extraordinarily volatile in 2026: from below $65/barrel in January, it surged over 65% to above $100 by mid-March (World Bank), spiked intermittently above $105–120 amid renewed strikes through April and July (Forbes Advisor, Goldman Sachs), and stood near $87–92/barrel in the days around 25 August 2026 as diplomatic signals from Oman and a softer-than-feared US sanctions package pulled the ‘war premium’ out of the price, per TradingEconomics and Eastern Herald market data. The IMF’s April 2026 World Economic Outlook frames three scenarios: a reference case assuming a roughly 19% oil-price rise in 2026, with global growth easing modestly; an adverse scenario with oil near $100/barrel through 2026 and $75 in 2027, cutting global growth to about 2.5% and pushing inflation to 5.4%; and a severe scenario with oil at $110 (2026) and $125 (2027), which the Fund says would bring the world to ‘a close call for a global recession’ near 2% growth. The World Bank’s April 2026 Commodity Markets Outlook separately puts Brent’s 2026 baseline average at $86/barrel (versus $69 in 2025), with a risk range of $95–115/barrel if disruptions prove more protracted, before easing to roughly $70 in 2027. Goldman Sachs has repeatedly revised its own scenario bands as the conflict evolved: its August 2026 view keeps a wide fork between roughly $70/barrel (Q4 2026) in a fast-normalisation, weak-demand downside case and above $130/barrel if Hormuz remains substantially disrupted through 2027, with an additional $25/barrel of upside modelled if disruption spreads simultaneously to the Bab-el-Mandeb Strait and Suez Canal.

Institutional and Financial-Stability Perspectives

The Bank for International Settlements’ 2026 Annual Economic Report frames the war as a textbook supply-side shock testing central banks’ ability to distinguish transitory energy-driven inflation from more persistent second-round effects, warning that commodity-driven terms-of-trade shocks can complicate monetary policy exactly when fiscal space is already constrained. The European Central Bank’s May 2026 Financial Stability Review separately finds the shock asymmetric across Europe, reviving memories of the 2021–22 gas crisis in gas-dependent Italy and the UK, while nuclear- and renewables-heavy France and Spain are comparatively insulated, and cautions that a more persistent energy-supply disruption or weaker growth could trigger a broader reassessment of sovereign risk.

Six-Month Oil Price Outlook

Base case: Brent trades broadly in an $80–100/barrel range through early 2027, consistent with Goldman Sachs’s post-MOU base case and the World Bank’s baseline, as partial Hormuz transit, continued OPEC+ supply additions, and gradual demand destruction from high fuel prices offset the still-unresolved political endgame. The IEA’s own numbers, a return to surplus by late 2026 even after a Q3 deficit, support a gradual easing bias absent fresh escalation.

Upside risk: A collapse of the Iran–Oman navigational-corridor talks, a fresh Israeli strike on Iranian nuclear or economic targets, or an extension of disruption to the Bab-el-Mandeb/Suez corridor could push Brent back above $110–130/barrel, consistent with the IMF’s severe scenario and Goldman’s upside case. Given Trump’s repeated pattern of threatening and then pausing strikes, and Netanyahu’s domestic political incentives to appear tough ahead of Israeli elections, this risk should be regarded as live rather than tail.

Downside risk: A durable reopening of Hormuz to pre-war traffic, the scenario Goldman modelled in June 2026, combined with softening global demand, could see Brent fall back toward $60–70/barrel by mid-2027, particularly if OPEC+ spare capacity (concentrated in Saudi Arabia and the UAE) is fully unlocked and inventories rebuild.

On balance, the structural features of this conflict — a geographically concentrated Iranian export system, a shipping industry still absorbing elevated war-risk costs, and a diplomatic track that has repeatedly stalled at the final stage — argue for oil prices remaining more volatile and structurally higher than pre-war norms even as the immediate crisis premium continues to unwind, unless a durable Hormuz security arrangement is reached and holds.

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