WTI crude jumps 2.75% to $77.29 as Hormuz talks stall

WTI September crude futures surged $2.07, or 2.75%, to settle at $77.29 a barrel Wednesday, leading a broad energy complex rally as diplomatic efforts to reopen the Strait of Hormuz hit fresh obstacles.

"There is still clearly a wide gap between the U.S. and Iran when it comes to management of the Strait of Hormuz, and, of course, the nuclear issue," ING said. "There is the very real risk that any deal unravels fairly quickly, as we saw with the memorandum of understanding."

The rally extended across the energy complex. Abu Dhabi Murban crude futures rose 2.21% to $79.66 a barrel, while NYMEX September gasoline settled at $2.9385 a gallon and heating oil at $3.8820 a gallon. Natural gas futures settled at $2.64 per million British thermal units. The gains came even as Brent crude briefly traded above $100 a barrel a week ago on fears the conflict could severely disrupt Middle Eastern oil supplies.

The price action reflects a market caught between diplomatic optimism and on-the-ground reality. Treasury Secretary Scott Bessent said Tuesday that a deal with Iran to reopen the Strait of Hormuz could be near, sending oil prices lower. But a new strike hit a ship moving through the strait, and negotiations ran into a dispute over fees. Iran's Islamic Revolutionary Guard Corps has reiterated that the strait will remain closed, warning countries assisting the United States they could face retaliation.

The supply picture remains tight. Wood Mackenzie estimates the conflict has reduced global oil production by at least 3 percent, with Iraq accounting for roughly 3 million barrels a day of lost output. Damage to infrastructure in Qatar is projected to cut global LNG supply by 2 percent. OPEC+ members said they will raise output by about 188,000 barrels a day in September, a sixth straight monthly increase that would complete the phased unwinding of 1.65 million barrels a day of voluntary supply cuts originally agreed in 2023.

The cash flow implications are significant. Wood Mackenzie now estimates the global upstream oil and gas sector could generate $495 billion in free cash flow in 2026 if crude averages $90 a barrel, more than doubling its previous forecast based on a $60 oil price assumption. The 49 national and international oil companies covered by the firm are expected to capture $272 billion of the total.

"This is not a natural commodity cycle. The price surge reflects geopolitical conflict, not underlying demand, and companies are well aware of it," said Fraser McKay, head of upstream analysis at Wood Mackenzie. "Balance sheets are stronger than they have been in years, but the instinct is to preserve that resilience and position for the future rather than spend now."

Energy companies have largely maintained capital discipline despite the unexpected influx of cash. Capex budgets are expected to remain flat while share buybacks are projected to decrease by 5 percent as boards prioritize balance sheet strength and deleveraging. Upstream M&A surged to a two-year high in the first half of the year, including Shell's $16 billion acquisition of ARC Resources and Devon's $25 billion merger with Coterra.

What happens next

The market's direction hinges on whether Washington and Tehran can reach a negotiated off-ramp. Bessent said a deal could be reached by Wednesday, but Secretary of State Marco Rubio said talks have made progress without reaching a final agreement. If prices hold through the second half of the year, pressure will build on energy companies to deploy excess cash through buybacks, acquisitions or new investment.

"If prices hold through H2, the pressure to deploy capital via buybacks, M&A or new investment will intensify," said Tom Ellacott, senior vice president of corporate research at Wood Mackenzie. "How boards navigate that tension will shape the industry's strategic direction into 2027."

This article is for informational purposes only and does not constitute investment advice.