After Iran announced the reopening of the Strait of Hormuz to navigation, European natural gas prices plummeted by 10% at one point during intraday trading. US crude oil prices recorded weekly losses of over 10% for two consecutive weeks, and both West Texas Intermediate (WTI) and Brent crude oil erased gains accumulated over more than five weeks. While tensions in the Strait of Hormuz have eased in the short term, uncertainties remain. Some analysts noted that Friday’s sell-off may have been somewhat excessive, and the state of negotiations could be more fragile than what oil prices currently reflect.
Amid a sudden easing of geopolitical risks, global oil and gas markets were hit hard on Friday. Iran announced the reopening of the Strait of Hormuz to commercial shipping, fueling expectations in financial markets that ceasefire talks between the US and Iran would resume and culminate in a long-term peace agreement. Crude oil prices plummeted during the trading session, hitting a more than one-month low.
Following Iran’s announcement to reopen the strait during the European stock trading session on Friday, losses in international crude oil futures and European natural gas futures quickly widened. The May contract for Dutch natural gas futures, the benchmark for continental Europe, fell by as much as 10% at one point, closing down 7.7%. During the early trading hours of the US stock market when prices hit their daily lows, WTI crude oil fell nearly 15%, while Brent crude dropped over 13%, marking another double-digit intraday crash within a week following last Wednesday.
By the close of trading, both US and Brent crude oil had erased gains accumulated over five weeks, hitting their lowest closing levels since March 10. WTI May crude oil futures settled down 11.45% at $83.85 per barrel, while Brent June crude oil futures closed down 9.07% at $90.38 per barrel.
Crude oil prices have now fallen for two consecutive weeks. WTI crude lost 13.17% this week, nearing the largest weekly drop since April 2020, with declines exceeding 10% each week for two consecutive weeks, resulting in a cumulative loss of 24.83% over the two weeks, marking the steepest two-week decline since April 2020. Brent crude fell 5.06% this week, which, although less severe than last week’s nearly 12.7% decline, has reversed nearly 20% after seven consecutive weeks of gains.
The rapid unwinding of geopolitical risk premiums has shifted the market from fears of supply disruptions to expectations of restored supply.
The core driver of this oil price collapse lies in the market’s repricing of supply disruption risks.
Previously, due to escalating conflicts in the Middle East, the Strait of Hormuz faced potential closure. This waterway handles about one-fifth of global oil transportation, and any disruption would significantly impact global energy supplies, causing oil prices to factor in substantial “war premiums.”
On Friday, Iran clearly stated that it would allow commercial vessels to pass through, which the market viewed as an important signal of easing tensions. Meanwhile, according to President Trump, following direct talks last weekend, the US and Iran will hold another round of discussions this weekend, with most key terms of the Iranian peace agreement already finalized, expecting a deal to be reached “within a day or two.”
Commentators noted that improved prospects for US-Iran negotiations have led the market to reassess supply outlooks. Others remarked that signs of a potential US-Iran agreement have reduced risk premiums.
Analysts believe that this shift indicates that the “extreme supply disruption scenarios” previously factored into oil prices are being rapidly removed.
Oil prices shift from a war premium to ‘fundamental pressures’.
As geopolitical risks ease, the focus of the oil market returns to supply and demand fundamentals.
On one hand, if the strait remains open, crude oil exports from the Middle East will return to normal, significantly alleviating pressure on the global supply chain. On the other hand, any easing of U.S.-Iran relations or partial lifting of sanctions could allow Iran’s crude oil exports to recover further, providing additional supply to the global market.
Morningstar cited analysis indicating that if tensions fully subside and normal shipping resumes, oil prices may gradually retreat to ‘pre-war levels,’ as the previous increase was primarily driven by risk premiums rather than a significant tightening of supply and demand fundamentals.
Additionally, on the demand side, uncertainties regarding global economic growth persist, compounded by the earlier rapid rise in oil prices, which has already suppressed consumption to some extent. This makes oil prices more susceptible to swift corrections once geopolitical support diminishes.
Short-term easing in the Strait of Hormuz situation, but uncertainty remains.
Despite Iran’s announcement of reopening the Strait of Hormuz, the market remains cautious about its sustainability.
Firstly, current statements from the U.S. and Iran are largely ‘policy signals,’ and the actual resumption of navigation still needs to be observed, including factors such as insurance, risk assessments by shipping companies, and changes in military situations. Secondly, regional stability has not been fully restored, and any unexpected incidents could reignite risk premiums.
Arne Lohmann Rasmussen, Chief Analyst at Global Risk Management, stated, ‘The market is currently pricing in the end of the war and the closure of the strait having ended. However, we note that only vessels sailing along Iran’s coastline are currently allowed, so it may not yet be fully open.’
Some analyses indicate that the market is rapidly retracting from a ‘worst-case scenario’ but has not yet fully entered a ‘stable supply’ state, meaning short-term oil price volatility may remain high.
Tyler Richey, editor of Sevens Report Technicals, believes that the sharp selloff in the oil market on Friday may have been somewhat excessive. This is because the details of a final and lasting ceasefire agreement between the US and Iran have yet to be fully finalized, and the current state of negotiations may still be ‘more fragile’ than what Friday’s oil price movements reflected.
Market Outlook: Oil Prices May Enter a High Volatility Range
According to a synthesis of institutional perspectives, future trends in oil prices will depend on two key variables:
- Geopolitical Developments: If substantial progress is made toward a ceasefire or negotiations, there remains further downside risk for oil prices.
- Pace of Supply Recovery: Including Iranian exports, OPEC+ policy adjustments, and changes in global inventories.
In the short term, the market has completed a round of significant risk repricing, with oil prices shifting from being ‘geopolitically driven’ to ‘fundamentally driven.’ Against the backdrop of unresolved uncertainties, the oil market may enter a phase of high volatility with rapid reactions to policy updates and news developments.