Crude oil "war premium" evaporates rapidly! U.S. crude drops over 8% intraday, Brent drops 9.5%
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International crude oil futures plunged across the board on Monday, after clear signs of easing Middle East geopolitical risks that had previously driven oil prices sharply higher. U.S. President Trump confirmed the suspension of a new round of strikes on Iran, leaving a window for diplomatic negotiations, and the market quickly trimmed the “war premium” that had been priced into oil.
On Monday, both U.S. oil and Brent oil hit intraday lows unseen since Monday, July 20. U.S. WTI crude fell to $81.99, down about 8.2% on the day; Brent crude dropped to $87.55, down 9.5% intraday.
Market analysts believe this round of sharp declines was not caused by a sudden deterioration in demand, but rather by the concentrated release of risk premiums that rapidly accumulated as a result of shipping risks in the Strait of Hormuz and an ongoing escalation of U.S.-Iran military conflict. However, several institutions have also warned that the current situation remains far from truly easing, and as long as military actions resume, oil prices could rebound sharply.
The market rapidly strips off the "geopolitical premium"; crude oil posts biggest intraday drop in at least two months
The immediate trigger for this round of oil price declines was the U.S. suspension of a new round of military action against Iran.
According to reports cited by CCTV, on the 25th, Trump ordered the U.S. military not to launch new airstrikes against Iran that day, ending nearly two weeks of consecutive daily strikes that had lasted 13 days. Sources said that on the one hand, Trump’s move was to leave more room for diplomatic negotiations, and on the other hand, he believed that the current airstrikes had largely reached their effect limit without the need for further major military operations.
In previous weeks, the market had continued to bet that the conflict could escalate further, and worried that shipping in the Strait of Hormuz could be more severely impacted, sending international oil prices soaring.
As expectations for military escalation temporarily cooled, traders quickly withdrew previously built risky positions.
Bloomberg reported that the market is now reassessing the probability of Middle East supply disruptions, and as the U.S. pauses military actions, "some of the geopolitical risk premium previously priced into crude oil is rapidly dissipating."
MarketWatch pointed out that, judging from the performance of international crude oil intraday, this Monday saw the biggest oil price drop in at least two months.
The report said that after the U.S. suspended airstrikes on Iran “for three days”, the market’s hopes for a diplomatic resolution to the crisis reignited, and both WTI and Brent crude tumbled. However, the media also stressed that the market is far from calm.
The report cited analysts as saying that as long as positive diplomatic progress continues in the future, oil prices could fall further; but if conflict escalates again, energy market volatility will remain very intense.
Wall Street: The market is repricing the "worst-case scenario"
Several Wall Street energy analysts believe this round of adjustment resembles a rapid correction of previously extreme risk expectations, rather than a sign that the market is betting Middle East risks are completely over.
In their latest report, Societe Generale analysts said:
If the conflict continues long-term without a clear resolution, every additional month could add about $10/barrel to oil prices.
Analysts believe this means the market still needs to retain some risk premium for potential future escalations, and oil price volatility is expected to remain high.
Many traders also pointed out that this drop mainly reflected the previous over-aggressive market pricing.
Wall Street insiders believe that before Trump announced a pause in military action, the market had started trading on even more extreme scenarios, including further disruptions to shipping in the Strait of Hormuz and broader attacks on regional energy facilities. And with the diplomatic window reopening, these most pessimistic expectations were rapidly removed, so oil prices fell much more sharply than other risk assets.
Risks are not eliminated—Hormuz remains the largest variable
Although market sentiment has clearly improved, analysts generally believe it is still premature to say Middle East risks are over.
The Wall Street Journal pointed out that the U.S. suspension of military operations has raised the likelihood of a diplomatic resolution to the crisis, and strengthened expectations that shipping through the Strait of Hormuz will eventually return to normal.
However, key variables—including Red Sea shipping security, Houthi attacks in Yemen, the Iran nuclear issue, and the future navigability of the Strait of Hormuz—remain unsettled. This means that future international oil prices will still be highly driven by geopolitical news.
Reuters likewise noted that this week, the market’s focus remains on whether U.S.-Iran contacts can make substantive progress. If negotiations fail and military action escalates again, the risk premium just released from oil prices could quickly return.
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