Oil prices sank further on Wednesday, with the international benchmark Brent trading well below $80 per barrel for the first time since early March, as optimism continued to drive prices lower following an interim peace agreement between the US and Iran that is expected to reopen the Strait of Hormuz by the end of the week.
The possibility of renewed traffic through the strait has helped ease fears of prolonged disruptions to energy supplies from the Gulf, a key source of global oil and liquefied natural gas exports.
The strategic shipping route has been effectively closed since the Iran war began on 28 February, sending Brent oil prices to near $120 a barrel at one point, and consequently pushing up prices globally. The US President Donald Trump said on Monday that the strait would be fully open by Friday and operate without transit charges.
Brent crude for next month’s delivery was trading at $78.37 a barrel at around 7 am CET, and the US benchmark WTI cost $75.45 a barrel at the same time. At the same time, European natural gas prices traded below €42 per megawatt-hour on Wednesday morning.
The Iran war and the de facto closure of the Strait of Hormuz have triggered the largest supply disruption in the history of the global oil market, according to the International Energy Agency (IEA).
The price of Brent has come down sharply from its $100-plus level of a few weeks ago, and has now tumbled more than 33% over the past month, as market expectations have shifted abruptly. However, it could still take months for the energy industry to get back to full speed.
Many analysts remain cautious, as significant hurdles remain in the negotiations, including what to do with Iran’s nuclear program. But the hope on Wall Street is that this agreement will mean a long-term fix to a conflict that has worsened inflation around the world.
Questions also remain over the speed at which regional production can recover. As for liquefied natural gas production, attention remains focused on Qatar’s Ras Laffan industrial complex, the world’s largest LNG export hub, following reports of significant damage to facilities there.
What Europe can expect
In a previous analysis, Euronews has outlined why European energy prices may not come down rapidly after the conflict is resolved, even if there is a decision to open the Strait of Hormuz.
Europe has been significantly affected, even though it sources only a small share of its oil and gas directly through the Strait of Hormuz, but it imports 80–85% of its oil overall, relying on international benchmark prices, particularly Brent crude, which has been significantly inflated by the crisis.
“Even if that peace is here tomorrow, still we will not go back to normal in the foreseeable future,” the EU’s Energy Commissioner Dan Jørgensen said in early April.
For prices to fall significantly across the bloc, war-risk insurance premiums and tanker freight rates will also need to decline, as both are key components of the delivered cost of crude.
And though freight rates appear to have stopped rising, there is little evidence yet of a sharp decline. At the same time, multiple shipping reports indicate insurers are still waiting for evidence that the Strait can operate safely before repricing risk.