Oil Plunges, Hormuz Reopening Still Awaiting Certainty
Oil prices fell sharply after the United States and Iran agreed to a temporary deal to reopen the Strait of Hormuz. Brent plunged 5.5% to below US$83/barrel, while WTI briefly fell below US$80/barrel. This decline extended the correction from the height of the war, with prices now more than 30% below their peaks at the height of tensions.
Market sentiment improved after US President Donald Trump announced he had authorized the "toll-free" opening of Hormuz and an end to the blockade on Iran. Iran's Fars News Agency said transit would be free for 60 days, while Iranian Deputy Foreign Minister Kazem Gharibabadi confirmed the agreement had been reached. However, the official text will only be made public after the signing in Switzerland on Friday.
Despite the immediate drop in oil prices, market participants have not yet fully considered the supply risk to be resolved. Ship owners, oil companies, and insurers are still awaiting technical details before resuming normal transit. Key obstacles include the potential for sea mines, persistently high insurance rates, and clarity about how much control Iran has over shipping through the waterway.
The Strait of Hormuz is a crucial chokepoint, carrying approximately one-fifth of global oil flows under normal conditions. During the war, the closure of the waterway disrupted energy markets and prompted various mitigation measures, including import cuts by China and the release of large emergency reserves. In recent weeks, some oil flows from the Gulf have begun to pass, helping to depress prices before the agreement was announced.
Fundamentally, the oil decline reflects a reduction in geopolitical risk premiums. If Hormuz is fully opened and shipping traffic returns to normal, supply pressures could ease and the risk of energy inflation would also decrease. This could ease pressure on central banks, including the Federal Reserve, which will review interest rate direction this week.
However, supply normalization is not automatic. Production from temporarily shut Persian Gulf fields could take months to recover due to technical and geological challenges and infrastructure damage. Market structure also suggests supply tightness is easing, with the nearest Brent spread narrowing to less than US$1/barrel in backwardation, down from more than US$12 in April.
The next market focus will be the official signing of the agreement, the physical opening of Hormuz, the response of insurance companies, the actual flow of ships through the strait, and the 60-day US-Iran nuclear negotiations. If implementation goes smoothly, pressure on oil could persist. However, if the details of the agreement are delayed or security risks remain high, oil prices could still experience volatility again. (gn)
Source: Newsmaker.id
