Two Straits, One Crisis: How the Red Sea Blockade Trapped the Oil Market

The escalation pattern that early-warning analysts have tracked for months crossed a critical threshold this week. The United States-Iran war, now in its fifth month, has expanded from one critical shipping chokepoint to two — and the second one was the escape valve the oil market was counting on.

On Thursday, Iran-backed Houthi fighters struck two Saudi oil tankers in the Red Sea’s Bab el-Mandeb strait, forcing several other vessels to turn around and head north through the Suez Canal. The Houthis announced a naval blockade of Saudi Arabia, the country that had been pumping millions of barrels each day through its east-west pipeline to Red Sea ports to skirt Iran’s near-total closure of the Strait of Hormuz on the other side of the Arabian Peninsula^[1].

That backup route is now gone. Kevin Morrison, an energy analyst at the Institute for Energy Economics and Financial Analysis, told ABC News that the Bab el-Mandeb was “a key route for Saudi Arabia to send its oil overseas when the Strait of Hormuz was shut, so that was a safety lever, but that’s now gone.” He warned that price pressures “could be more sustained if there is no resolution to this conflict … and at the moment, we’re not seeing any signs of that”^[2].

Hormuz traffic collapses to one ship

The numbers tell the story of how narrow the bottleneck has become. The number of tankers crossing through the Strait of Hormuz fell to just one on Thursday — the lowest since May 7^[1]. Iran has demonstrated it can hit U.S. targets across the region despite Trump administration claims that it had degraded Tehran’s military capabilities. Iran’s Revolutionary Guards said they struck U.S. military equipment depots at Camp Buehring in Kuwait, positions at Camp Arifjan and Camp Doha near Kuwait City, a surveillance tower used by the U.S. Fifth Fleet in Bahrain, and U.S. barracks and fighter jets in Jordan^[1].

The Revolutionary Guards issued an unusual public warning to Gulf state populations, telling people to “immediately move away from areas within a 500-meter radius of covert and hidden locations used by U.S. military personnel” — language that signals Iran may be preparing to strike targets embedded in civilian areas^[1].

Four people familiar with U.S. intelligence said Iranian strikes on CIA targets in the Gulf earlier in the war prompted an investigation into whether Russia is assisting Iran with targeting information or drone technology. The Kremlin declined to comment^[1].

US strikes reach Iran’s Caspian coast

President Donald Trump vowed “major military punishment” for Tehran and its Houthi allies, telling Axios that he was considering re-launching major combat against Iran. “They haven’t received enough pain yet,” he was quoted as saying^[1].

On Friday, U.S. missiles struck targets across Iran, reaching as far as its Caspian Sea coast — a significant geographic expansion of the bombing campaign. U.S. projectiles struck the port city of Bandar Anzali and a Revolutionary Guards Navy headquarters in Gilan province, according to Iranian media. Four people were reported killed and five injured in a U.S. attack on the city of Ahvaz^[1].

Jordan’s army said it downed seven Iranian missiles and six drones; the attack caused no material damage or casualties^[1].

Oil back above $100

Brent crude rose more than 6% on Thursday, crashing through $100 per barrel for the first time since late May^[2][1]. Although Brent futures eased almost 3% to under $98 on Friday on reports of potential diplomatic progress and profit-taking, the contract remained on course for a weekly advance of more than 10%^[1].

The AAA national average for a gallon of gasoline crossed $4 this week, a level not seen in over a month^[3]. The pass-through is already visible beyond the pump: Coca-Cola has raised prices of Diet Coke in India — sold there mostly in aluminum cans — by more than 10% as the conflict chokes its supply chain^[1].

Shipping insurance costs through the southern Red Sea doubled for some companies on Thursday^[1]. Aramco has begun offering customers more oil shipments from ports in Egypt to avoid the Houthi blockade^[2].

Fed hike odds triple in a week

The oil shock is now feeding directly into monetary policy expectations. CME’s FedWatch tool now assigns roughly a 38% probability to a quarter-point rate increase at the Federal Reserve’s July 29 meeting — up from below 12% just seven days earlier^[3]. On prediction market platform Kalshi, contracts tied to a September quarter-point increase were trading at 48% by Thursday afternoon, having started the week near 30%^[3].

Futures markets now see roughly an 82% chance the Fed tightens policy at its September meeting — more than 29 percentage points above where that figure stood one week prior^[3].

The case for a hawkish pivot has several pillars. June FOMC minutes showed nine of 18 policymakers saw the case for at least one rate hike before year-end, with the minutes noting that persistent inflation driven by Middle East energy disruptions was among scenarios where “some policy firming would likely be warranted”^[3]. Total PCE price inflation rose to an estimated 4.1% in May, with core PCE estimated at 3.4%^[3]. Thursday’s jobless claims data showed first-time filings falling to 187,000 for the week ending July 18 — a count not recorded since 1969^[3].

Not everyone is convinced the pricing is right. TD Securities’ Gennadiy Goldberg and Molly Brooks said market pricing for Fed hikes has risen alongside higher oil prices and U.S.-Iran tensions, but they judge a July move as unlikely. They see significant risk of rate hikes later in 2026, yet consider current July FOMC pricing excessive^[4].

Fed Chair Kevin Warsh faces the decision on Wednesday. The prevailing view among economists surveyed by FactSet still calls for no rate increases in 2026, with the expectation shifting to modest easing — roughly half a percentage point in cuts — sometime in 2027^[3].

A new tariff wall on 60 countries

The geopolitical risk arrives alongside a fresh trade-policy shock. On Friday, the United States imposed new tariffs of 10% and 12.5% on goods from 60 trading partners — covering 99.4% of American imports — alleging those countries failed to curb imports made by forced labor^[5].

The duties hit the top 60 U.S. trade partners. Countries that have not adopted or committed to import prohibitions on forced-labor goods — including China, Australia, Singapore, South Korea, and Brazil — face the 12.5% rate. Those that have — including Malaysia, Taiwan, Indonesia, India, and Canada — face 10%^[5]. The measure replaces a temporary 10% global tariff under Section 122 that expires July 24, itself a stopgap put in place after the Supreme Court ruled Trump’s emergency-powers tariffs unlawful in February^[5].

The Peterson Institute for International Economics characterized the investigation as “not a labor-standards exercise but a mechanism for exporting America’s import ban on Chinese goods, as well as an attempt to recreate the tariff regime struck down by the Supreme Court”^[5]. Crucially for markets, most major partners signaled they would negotiate rather than retaliate, and electronics carve-outs remain for most Asian economies^[5]. The EU signaled relief that the transatlantic truce largely held^[6].

How the market absorbed it

Thursday was the week’s stress test. The S&P 500 fell 1.2% — its worst loss in a month — while the Dow dropped 506 points (~1%) and the Nasdaq composite sank 2.2%, pressured by rising oil prices and disappointing earnings from Alphabet and Tesla^[7]. Alphabet dropped nearly 7% on AI spending concerns; Tesla tumbled more than 14%^[8]. Larry Tentarelli of the Blue Chip Daily Trend Report called it “a perfect storm of headwinds”^[3].

Friday brought a partial decompression. U.S. equities finished mixed as oil prices slipped for the first time in a week. The S&P 500 edged up 0.05% to close at 7,411.96; the Dow rose 0.45% to 51,946.51; the Nasdaq declined 0.64% to 24,975.82^[8]. For the week, the S&P lost 0.61%, the Dow fell 0.38%, and the Nasdaq dropped 2.13% — the index’s first back-to-back weekly loss since March^[8][9].

The more telling signal was breadth. The equal-weight S&P 500 advanced 0.71% on Friday while the cap-weighted index rose just 0.05% — a 66-basis-point gap that suggests a targeted rotation out of major technology stocks rather than broad-based selling^[8]. Peter Andersen of Andersen Capital Management said fear of missing out had shifted to “a fear of massive overbuilding” in AI infrastructure^[8].

Energy stocks have been the clear beneficiary of the geopolitical risk. The S&P 500 energy sector has surged roughly 30% in 2026, with ExxonMobil and Chevron both up more than 25% year-to-date^[10]. ExxonMobil closed at $156.93 on Friday^[10]. Both companies are expected to report Q2 earnings next week with EPS projected to more than double from a year ago^[10].

What to watch next

The week ahead is unusually dense with catalysts that will determine whether the dual-strait crisis deepens or de-escalates:

• July 29 FOMC decision: The Fed announces its rate decision on Wednesday. Futures now price a 38% chance of a hike — a coin-flip-adjacent probability that itself creates volatility risk either way. GDP, monthly inflation figures, and consumer sentiment data are also scheduled^[8].
• Big Tech earnings flood: Microsoft, Meta Platforms, Amazon, and Apple all report next week. Nearly a third of S&P 500 companies are scheduled to report. As of midweek, S&P 500 earnings were running 26.5% higher year-over-year per LSEG data — a high bar that leaves stocks vulnerable to any guidance disappointment^[8].
• Hormuz and Bab el-Mandeb traffic: The critical indicator is whether tanker traffic through either strait recovers or deteriorates further. Hormuz traffic at one ship per day is already at crisis levels. Any further Houthi attacks on Red Sea shipping would eliminate the last viable routing alternative.
• Iran’s response to the Caspian strikes: The U.S. strikes reaching Iran’s northern coast represent a geographic escalation. Iran’s warning to Gulf state civilians to evacuate areas near U.S. military personnel suggests potential strikes on targets in populated areas — a pattern that would dramatically raise the escalation ladder.
• Russia’s role: The U.S. intelligence probe into whether Moscow is providing Iran with targeting data or drone technology, if confirmed, would transform the conflict from a bilateral U.S.-Iran confrontation into a proxy dimension of great-power competition^[1].
• Saudi pipeline and Yanbu port: Both the east-west pipeline and the Yanbu terminal on Saudi Arabia’s west coast were attacked by Iran at the height of the war^[2]. Any renewed strikes on this infrastructure would remove the last overland bypass option.
• Oil price stability zone: Brent pulled back below $98 on Friday on reports of a China-backed diplomatic push to end the fighting^[10]. Whether that holds — or whether crude makes another run at $100+ — will anchor the Fed and earnings narrative into August.

The early-warning signal is this: the oil market has lost both its primary route (Hormuz) and its backup route (Bab el-Mandeb) in the span of one week. There is no third option. Every additional day this dual blockade persists tightens the supply picture, feeds inflation expectations, and raises the probability that the Fed abandons its hold. The question is no longer whether the geopolitical risk has reached markets — it has. The question is whether diplomacy can re-open a strait before the FOMC meets.