Market Overview

Oil prices are falling, but not giving up

News of US-Iran talks has knocked 10% off Brent’s price.
It will take months to rebuild infrastructure, which will support oil prices.

Donald Trump has declared himself the outright victor in the war, whilst Iran has pledged to reopen the Strait of Hormuz. However, many shipowners will remain extremely cautious, fearing a sudden resumption of hostilities. Such a scenario cannot be ruled out, given the significant differences in the parties’ positions. Therefore, Brent and WTI’s reaction to the ceasefire news appears to be a respite, not oil’s capitulation.

Fig. 1. Oil prices have fallen sharply but remain far from pre-conflict levels.

It could take months for the Strait of Hormuz to resume operations at full capacity. This will continue to keep oil prices high, as will the damage inflicted on the region’s energy infrastructure. According to Bloomberg experts, OPEC output fell by 7.56 million bpd in March, the largest reduction in the last four decades.

The EIA estimates the supply shortfall at 7.5 million bpd and forecasts that this will rise to 9.1 million bpd in April. Provided that the conflict in the Middle East is resolved this month, the shortfall in supplies in May will fall to 6.7 million bpd. The figure will not return to pre-war levels until the end of 2026. Considering this, the EIA has raised its average Brent price forecast for this year from $79 to $96 per barrel.

Restoring energy infrastructure is a lengthy process. However, this does not detract from Donald Trump’s achievements. Before the ceasefire announcement, competition between European and Asian buyers had driven spot prices for North Sea Forties to $146 per barrel and for Arab Light to $150 per barrel. These are record levels, driven by current panic over supplies, rather than in June or July.

Fig. 2. The price differential between Brent and WTI has returned to normal following the sharp fluctuations in March.

News of the truce sent Brent plummeting at its fastest rate since 23 March, when Donald Trump announced US-Iran talks scheduled for 10 April. No one knows how the April talks will end. However, restoring energy infrastructure will be a long process, which will allow oil to find support.

The FxPro Analyst Team

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