Oil prices are expected to fall further if the ceasefire between Iran and Israel holds, according to experts.
Things took a dramatic turn on Tuesday after US President Donald Trump announced a ceasefire and expressed his desire to maintain the flow of oil from Iran.
On Tuesday, both Iran and Israel indicated a temporary end to their air conflict. This development followed a public reprimand from Trump, who accused them of breaching a ceasefire agreement.
Trump, in a Truth Social post on Wednesday further, expressed his hope that China would continue purchasing Iranian oil, while also buying “plenty” from the US.
However, a senior White House official later signalled to Reuters that curbs on Iran would remain.
Risk premium vanishes
The risks to oil supply have therefore vaporised over the last couple of days.
Brent crude is currently trading around $68 a barrel, having recently experienced a 13% decline over the last two days. Meanwhile, West Texas Intermediate crude was trading around $65 a barrel, experiencing a similar fall.
Brent’s time spread, though softening from last Thursday’s peak of $1.77 per barrel in backwardation to about $1 per barrel this morning, remains high, according to analysts at ING Group.
For the first five months of the year, this figure typically ranged from $0.25 to $0.50 per barrel.
Meanwhile, the fall in WTI crude prices was somewhat larger due to the contract rollover, according to Commerzbank AG.
“This means that all gains since the start of the escalation on 13 June have now been reversed,” Carsten Fritsch, commodity analyst at Commerzbank, said.
By Monday morning, the substantial risk premium on oil prices had effectively vanished.
Supply fears recede
Market participants now perceive a low risk of supply shortfalls, based on their belief that the conflict in the Middle East will not re-escalate.
“In particular, the worst-case scenario for the oil market, namely a closure of the Strait of Hormuz, is probably off the table for the time being,” Fritsch said.
“Assuming the ceasefire holds, it reinforces our view that de-escalation was more likely than a full blockade of the Strait of Hormuz – a move that would have triggered a sharp spike in oil prices,” Mukesh Sahdev, global head of commodity markets at Rystad Energy, said in an emailed commentary.
The prospect of severe economic fallout from a potential blockade likely motivated both sides to agree to the ceasefire if it is indeed genuine.
According to Rystad Energy, Brent crude prices are likely to trade near $70 per barrel for the time being, while clarity on the US-Iran deal emerges, assuming the ceasefire holds.
Will the ceasefire hold?
The critical question now is whether the ceasefire will hold and a lasting peace solution can be found.
“If so, a further fall in the oil price could be expected. This is because the oil market is amply supplied thanks to the rising oil production of OPEC+,” Commerzbank’s Fritsch said.
Meanwhile, Rystad Energy’s view is that the Organization of the Petroleum Exporting Countries and allies will remain focused on preventing the market from slipping into contango (where forward prices exceed spot prices) even if that means accepting lower oil prices in the near term.
“Market fundamentals through August appear constructive, presenting a good opportunity for OPEC+ to return some barrels to the market,” Sahdev noted.
Speculation may also arise regarding new discussions between the US and Iran, potentially leading to an easing of sanctions against Iran.
Preliminary US intelligence suggests airstrikes only set back Iran’s nuclear capability by months, not destroying it, as a shaky US-brokered ceasefire between Iran and Israel holds.
However, should the ceasefire fail and the war intensify, an increase in oil prices is probable.
It remains to be seen whether the damage to Iran’s nuclear facilities is severe enough to halt the nuclear program.
Fritsch said:
If this is not the case and Iran continues to enrich uranium, the current ceasefire would only be a temporary reprieve.
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