The price of peace: why oil is quietly stepping back

Oil market analysts have forecast a sustained sell-off in crude prices, as peace talks between the US and Iran continue to weigh on sentiment.

IMAGE: The Strait of Hormuz. Getty Images

The US-Iran Memorandum of Understanding (MoU), mediated by Qatar and Pakistan, has triggered a substantial sell-off in the oil market, exceeding the expectations of most analysts.

Oil prices came under downward pressure last month, when Washington and Tehran signed a temporary 60-day peace accord, committing to a complete cessation of hostilities. This agreement led to the lifting of the US naval blockade and the restoration of commercial transit through the Strait of Hormuz.

Brent crude’s price has plunged, currently trading slightly above $70/bbl, from a high of around $118/bbl in April when the US-Israel war against Iran peaked, global investment bank Goldman Sachs reported. 

“The price action in recent weeks reflects a market that is treating this temporary ceasefire between the US and Iran as a permanent deal,” ING Bank’s head of commodities strategy Warren Patterson noted.

The decline in oil prices stem from a key factor, according to market analysts: an over-anticipation of normalised supply through the Persian Gulf.

“Of course, there is always the potential for the ceasefire to be extended, which would effectively be kicking the can down the road,” Patterson said.

Oil has stopped panicking now that Persian Gulf flows are resuming

Vessel tracking data indicates that oil flows through the Strait of Hormuz are rebounding. Over the last week, an estimated 7 million b/d of oil transited the region, according to Patterson.

“Even as the flow of oil through the Strait may increase meaningfully, markets probably already reflect the [US-Iran] agreement,” Goldman Sachs’ co-head of global oil and products trading Jerome Dortmans said.

Notably, the current oil flow through the strait remains well below pre-war levels of 20 million b/d. However, the oil market does not require a full return to those volumes for a complete supply recovery, as some crude oil from Saudi Arabia and the UAE can bypass the strait via pipeline diversions.

“Hormuz does not need to run at full capacity for the market to function. Around 70% traffic, plus pipeline alternatives and inventory drawdowns, can keep the lights on,” SPI Asset Management’s managing partner Stephen Innes said.

By Aparupa Mazumder

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