Last month, U.S. President Donald Trump issued a 60-day waiver for the Jones Act in a bid to lower oil prices amid severe supply disruptions due to the closure of the Strait Of Hormuz. The Jones Act, aka Merchant Marine Act of 1920, is a federal statute requiring that all goods transported by water between U.S. ports be carried on ships that are U.S.-built, U.S.-owned, U.S.-flagged and U.S.-crewed. The law is meant to ensure a reliable, domestic shipyard industrial base and skilled mariners in times of war or national emergency, and also protects the American maritime fleet from foreign competition. Unfortunately, the suspension has not achieved the desired effect, with oil prices remaining elevated as the waiver approaches the 30-day mark, with supply disruptions and shifting market incentives largely neutralizing its impact.
“It is estimated that it’s going to be about 3 cents on the East Coast and it might go up on the Gulf Coast, but these changes are so small that they’re overshadowed by the spikes in oil prices, and the oil prices keep going up,” Usha Haley, a professor of management at the Wichita State University, told Al Jazeera.
Oil prices continued to pull back from recent highs on Tuesday, primarily due to renewed optimism for diplomatic talks between the U.S. and Iran coupled with a significant downward revision in global demand forecasts by the International Energy Agency (IEA) and OPEC. Brent crude for June delivery declined 4.2% to trade at $95.09 per barrel at 13.45 pm ET on Tuesday while WTI crude for May delivery fell 7.0% to change hands at $92.15/bbl.
Related: South Korea Locks In 273 Million Barrels of Crude That Won’t Touch Hormuz
The International Energy Agency has predicted that high oil prices will trigger demand destruction, and has revised its 2026 outlook from a projected rise of 640,000 bpd to a contraction of 80,000 bpd. The energy watchdog has forecast a demand drop of 1.5 million bpd in the second quarter of 2026, the sharpest decline since pandemic-led lockdowns. The IEA says demand destruction will be most acute in Asia-Pacific and the Middle East, particularly affecting LPG (liquefied petroleum gas), naphtha and jet fuel.
The IEA prediction came just days after OPEC cut its Q2 2026 global oil demand by 500,000 barrels per day. Second quarter demand is now expected to average 105.07 million bpd, down from the previously estimated 105.57 million bpd; however, OPEC maintained its full-year 2026 oil demand growth forecast at 1.38 million bpd.
While oil prices have dropped significantly from their March multi-year highs, they remain $20-$25 per barrel above pre-war levels. Other than the blockade at the Strait of Hormuz, export arbitrage is also supporting higher oil prices. Indeed, U.S. refiners are earning significantly higher margins by exporting fuel to Europe and Asia rather than shipping it domestically. The surge in long-haul export voyages has absorbed available shipping tonnage, causing freight rates to skyrocket for both domestic and foreign-flagged vessels, which combined with higher operating costs for foreign refineries makes selling abroad more profitable than the domestic market. This has resulted in a situation whereby European gasoil futures are trading above $200 a barrel while U.S. diesel futures remain under $185.
Meanwhile, a severe mismatch has emerged where physical spot oil prices are outstripping on-paper futures contracts as nations scramble for immediate replacement barrels. While futures contracts are pricing in a potential short-lived disruption or a hopeful ceasefire, the physical spot market (real-world barrels) is pricing immediate scarcity and physical constraints. Refiners in Europe and Asia are competing fiercely for alternative, non-Middle Eastern crude grades, such as those from the North Sea. This has opened a roughly $35-$40 spread between spot oil and futures contracts. Further, the oil curve is in extreme backwardation, with front-month contracts holding a massive premium over future months, indicating that future supply is expected to be much more abundant than immediate supply.
That said, global oil flows and near-term oil prices are likely to be dictated by the resolution of the latest deadlock between Washington and Tehran. The U.S. Central Command (CENTCOM) reported on Tuesday that no ships successfully passed through the U.S. naval blockade, contradicting earlier reports that at least three or four Iran-linked vessels crossed the strait during the same period. More than 10,000 U.S. sailors, marines, and airmen supported by over a dozen warships and dozens of aircraft are enforcing the blockade ordered by President Donald Trump following the collapse of peace talks in Islamabad over the weekend.
The blockade has drawn sharp reaction, with China’s Foreign Ministry calling the move “dangerous and irresponsible”, while Iran has labeled the blockade an “act of piracy” and a violation of its sovereignty. Talks between the two warring nations are expected to resume this week.
By Alex Kimani for Oilprice.com
