-- Oil futures eased on Thursday with Brent breaching $126 per barrel mark earlier in the session as traders braced for a prolonged supply deficit fueled by the US-Iran war.
Front-month Murban crude futures slipped by 3.4% to $109.61 per barrel, while Brent futures fell 3.3% to $114.11/bbl and hit a high of $126 earlier in the session.
"Brent cracks 120/bbl as supply shortages mount," ANZ analysts said.
"The rally in crude oil prices shows no signs of slowing, as the prospect of an indefinite closure of the Strait of Hormuz weighs on sentiment," ANZ added.
The breakdown in diplomacy, paired with a directive from President Trump to prepare for an extended blockade, has left traders bracing for a protracted supply deficit that demand destruction alone may not be able to bridge.
"The breakdown of talks between the US and Iran, along with President Trump reportedly rejecting Iran's proposal for a reopening of the Strait of Hormuz, has the market losing hope for any quick resumption in oil flows," ING said.
"While we estimate demand destruction in the region of 1.6m b/d, which is significant, it's clearly not enough to fill the supply gap we are currently facing," ING added.
The market's ability to rely on existing stockpiles is rapidly eroding.
Data from analytics firm Kpler indicates that Iran has only 12 to 22 days of unused storage capacity remaining.
Once these facilities are full, Tehran will be forced to cut daily output by an additional 1.5 million to 1.6 million barrels per day.
This looming cut would be layered on top of the estimated 10 mb/d already shut in due to the strait's closure.
ING analysts warned that while regional demand destruction is estimated at roughly 1.6 mb/d, it remains insufficient to fill the widening supply gap, suggesting that significantly higher prices may be the only remaining lever to balance the market.
US crude stockpiles dropped by 6.2 million barrels to 459.5 mmbbls in the week ended April 24, the Energy Information Administration said in its weekly report on Wednesday, amid signs of tightening supplies.
Meanwhile, Trump on Wednesday reportedly said the UAE's decision to leave OPEC could help ease rising energy prices.