Baghdad: Oil prices are experiencing fluctuations as the anticipated reopening of the Strait of Hormuz remains uncertain, with analysts warning that the current price stability may not persist. Brent crude futures concluded last week with a decline of more than 7% after signals from Washington suggested an impending agreement with Tehran to alleviate the maritime chokepoint.
According to Iraqi News Agency, the situation took a turn over the weekend as the likelihood of an agreement diminished. Tehran insists on several conditions before reopening the strait, while U.S. President Donald Trump indicated a strategic shift, emphasizing economic pressure over immediate military action in an interview with Axios.
Despite the current uncertainty, energy markets have found temporary solace in ongoing negotiations between Iran and Oman regarding a provisional shipping route through the strait. This, coupled with expectations of restrained military escalation between the U.S. and Iran, has provided some market confid
ence.
Modupe Adegbembo, an economist at Jefferies, commented that traders remain hopeful for some form of agreement, even if it’s not ideal, as it would facilitate the flow of oil through the Strait of Hormuz. However, Adegbembo cautions that this optimism is “time-sensitive” and prices may not remain stable if the deadlock extends into the coming weeks.
Kieran Tompkins from Capital Economics noted that current oil prices reflect investor consideration of two scenarios: a swift resumption of energy flows or a prolonged closure. Should the deadlock continue, traders may increase the probability of a long-term closure, potentially driving up oil prices significantly.
The possibility of reaching a tipping point in the oil market, where inventory drawdowns are exhausted and demand must decrease to match supply, looms if the strait remains closed and OECD oil inventories deplete rapidly. This scenario could lead to prices soaring to $120-140 per barrel.
Questions arise regarding the sustainability of alternati
ve market factors, such as bypass routes, reduced demand, increased production, and a temporary dip in Chinese oil imports, in mitigating supply shortages. Amrita Sen of Energy Aspects highlighted China’s role in stabilizing the market with reduced imports earlier in the year, but with imports expected to rise, the downward pressure on crude prices may not last.
Recent market behavior has shown a tendency to prematurely price in the normalization of shipping flows based on potential deals rather than actual supply conditions, with ongoing infrastructure strikes adding to the instability. Sen emphasized that the fundamental market setup remains bullish.