The geopolitical risk premium that had supported international oil prices since the outbreak of conflict in the Middle East is now being rapidly unwound.
As shipping through the Strait of Hormuz returns to normal and the US and Iran send positive signals regarding ceasefire negotiations, Brent crude prices fell below $75 per barrel on Wednesday, retreating to the levels seen before the conflict began.
Market focus is shifting from the risk of supply disruptions to expectations of supply restoration. An increasing number of tankers are resuming transits through the Strait of Hormuz, and exports from major producers like the UAE are nearing pre-war levels, causing the factors that previously drove up spot premiums and futures risk premiums to dissipate quickly.
At the time of writing, Brent crude was down over 4%, trading at $73.71 per barrel, while WTI crude futures fell 4.41% to $69.98 per barrel. Compared to the peak reached during the war, international oil prices have now fallen by nearly 40% in total.
Strait of Hormuz Traffic Gradually Recovers
The core reason for the recent price decline is a significant cooling of market concerns over supply disruption risks in the Strait of Hormuz.
Reports indicate that data shows a growing number of tankers are reactivating satellite positioning signals while traversing the Strait of Hormuz, reflecting a restoration of shipowner confidence in the safety of the waterway. The International Maritime Organization (IMO) stated it has received relevant security assurances, allowing hundreds of vessels to leave the Persian Gulf.
Simultaneously, negotiations between the US and Iran aimed at ending the war are sending encouraging signals. Although differences in stance remain and talks are expected to be prolonged, markets have begun to price in expectations of a geopolitical risk de-escalation ahead of time.
UAE Exports Approach Pre-War Levels
The faster-than-expected pace of supply recovery is further eroding the support for oil prices.
The International Energy Agency (IEA) estimates that UAE crude exports have now recovered to approximately 85% of their pre-war level. Alternative transport and export channels established during the conflict continue to function, meaning the actual shipping disruption through the Strait of Hormuz has been far less severe than initially feared by the market.
Data indicates that significant volumes of crude have been shipped out through the Strait in recent weeks, with the UAE alone having sold about 60 million barrels from its crude inventories located in the Persian Gulf.
As supply continues to flow to the market, clear signs of weakness are emerging in the spot market. Key indicators of market tightness, such as the Brent crude front-month spread, have been declining steadily, and spot premiums for North Sea and West African crudes have also fallen noticeably, signaling that competition among buyers for immediate crude supplies is cooling.
Risk De-escalation Drives Sharp Price Drop, but Low Inventories Limit Downside
With transport resuming, exports increasing, and diplomatic talks making progress, the market is gradually recognizing that the resilience of the global crude supply chain is stronger than anticipated, leading to a rapid unwinding of the previously accumulated risk premium.
However, signs of tight supply persist in some regional markets. Data from the American Petroleum Institute (API) shows that crude inventories at Cushing, Oklahoma, fell again by about 1 million barrels last week. If subsequent data from the US Energy Information Administration (EIA) confirms this, Cushing stocks would fall below the key threshold of around 20 million barrels, widely considered the minimum operating level.
Analysts suggest that while the cooling of geopolitical risks has driven a significant price correction, low US inventories and continued supply tightness in some parts of the world mean oil prices are unlikely to completely escape volatility in the near term.
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