Oil prices fall to pre-Iran conflict levels amid easing tensions

International oil prices experienced a sharp decline on Thursday, falling to their lowest points since before the conflict with Iran erupted in late February. This significant drop is largely due to a developing agreement for a temporary cessation of hostilities, the anticipated reopening of the vital Strait of Hormuz, and the potential easing of sanctions against Tehran, all of which bolster expectations of increased global oil supply.

Brent crude futures saw a decrease of $1.85, or 2.33%, settling at $77.69 per barrel by mid-morning. Similarly, U.S. WTI crude futures dropped by $1.89, or 2.46%, to trade at $74.90 per barrel. The Brent benchmark reached its lowest level since February 27, the final trading day before initial U.S. and Israeli strikes against Iran. WTI crude hit its lowest point since March 4.

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The potential reopening of the Strait of Hormuz eliminates the large risk premium that had been incorporated into the price of crude due to the disruption of 20% of global oil flows.

Analysts suggest that the potential reopening of the Strait of Hormuz, through which approximately 20% of global oil flows, is removing a significant risk premium previously factored into crude prices. While some anticipate a gradual return to full normalization, involving insurance, repairs, and sanctions relief, the market sentiment points towards a clear direction of increased supply. Goldman Sachs forecasts a return of Gulf exports to pre-conflict levels by late July, with full crude production recovery by October. BNP Paribas, however, views $75 per barrel as a stable floor for the immediate future, noting that Brent traded around $60-$70 in the first two months of the year prior to the conflict.

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although some argue that full normalization may take weeks - insurance, repairs, sanctions relief - the direction is clear and, as we have seen, the most pessimistic timeline has proven overly pessimistic.