- Markets are betting on a quick solution to the US-Iranian conflict.
- The decline in Brent and WTI prices is likely to be sharp but short-lived.
At the beginning of the week, the nearest Brent crude futures contract once again exceeded $113, reaching the ceiling that was formed since the beginning of the armed conflict in the Middle East after news of Iran resuming its attacks on the energy infrastructure of the United Arab Emirates. However, on Wednesday, Brent crude fell more than 10% on the day to $97, as the US announced the maintenance of a ceasefire and the end of Operation Epic Fury. Donald Trump announced progress in negotiations with Tehran, and the latter indicated that it was ready to reach an agreement. This is a somewhat unusual turn of events, as we have become almost accustomed to a torrent of contradictory statements.
Looking to the future, markets take words at face value and view numbers as a snapshot of the past. But in any case, Iran’s attacks on Fujairah fanned the flames and threatened to reduce global supplies by another 1.9 million barrels per day. Global oil reserves are rapidly dwindling. The United States found itself in a better position to exploit favorable winds, after it became the largest oil exporting country in the world, by about 6 million barrels per day, surpassing the Kingdom of Saudi Arabia. In theory, the number could reach 10 million barrels per day, but in practice, the ceiling is much lower, about 6-7 million barrels per day.
Russia has also benefited from the crisis in the Middle East. Average crude oil flows over the past four weeks jumped to their highest levels since December. Export revenues reached $2.42 billion for the week ending May 3, the highest level since February 2022.
Washington’s upbeat rhetoric and reluctance to escalate tensions allow markets to view a US-Iran peace deal as the baseline scenario. The rapid resumption of shipping will lead to a short-term increase in supplies from tankers stuck in the Strait of Hormuz, which will lead to a decline in the price of Brent and WTI.
However, the depletion of global inventories and the time needed to repair damaged infrastructure in the Gulf states suggest that oil is unlikely to fall to the levels seen at the end of February – below $72 for Brent and $67 for WTI – by the end of the year. Under this scenario, international trade risks losing more than 0.5 percentage points of growth. WTO forecasts for March indicate growth will slow from 4.6% in 2025 to 1.9% in 2026, with a partial recovery to 2.6% in 2027.
