Strait of Hormuz reopens, hopes for long-term ceasefire rise, crude oil plunges over 10% during trading

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Against the backdrop of the sudden easing of geopolitical risks, the global oil and gas market was hit hard on Friday. Iran announced the opening of the Strait of Hormuz to commercial ships, heating up expectations in financial markets of renewed US-Iran ceasefire negotiations and the signing of a long-term peace agreement. Crude oil prices plunged sharply during trading, hitting the lowest levels in over a month.

After the news of Iran reopening the strait during the European stock trading session on Friday, international crude oil futures and European natural gas futures quickly expanded their losses. The May contract of the benchmark Dutch natural gas futures on the European continent fell as much as 10% and closed down 7.7%. During early US trading, US WTI crude oil dropped nearly 15% intraday, Brent crude oil fell over 13%, and for the second time in a week and again after last Wednesday, saw a double-digit slump during the trading day.

By the close, both US and Brent crude erased gains from the past five weeks, with both closing at their lowest levels since March 10. WTI May crude oil futures closed down 11.45% at $83.85/barrel; Brent June crude oil futures closed down 9.07% at $90.38/barrel.

Crude oil has now fallen for two consecutive weeks. US crude dropped 13.17% this week, approaching the largest weekly loss since April 2020 made last week, and has fallen more than 10% in each of the last two weeks, a total loss of 24.83% over two weeks, marking the biggest two-week drop since April 2020; Brent crude fell 5.06% this week. While this decline is less than the nearly 12.7% drop last week, after seven consecutive weeks of gains, Brent has now dropped nearly 20% in two weeks.

Geopolitical Risk Premium Quickly Cleared, Market Turns From Supply Disruption Panic to Supply Recovery

The core driver of this sharp drop in oil prices is the market's re-pricing of supply disruption risks.

Previously, due to escalating conflicts in the Middle East, the Strait of Hormuz faced a risk of blockade. This waterway carries about one-fifth of the world's oil shipments; any interruption would significantly impact global energy supply, so oil prices had priced in a substantial "war premium."

On Friday, Iran explicitly stated it would allow commercial ships to pass, which the market viewed as an important signal of easing tensions. Meanwhile, according to US President Trump, following last weekend's direct talks, the US and Iran will meet again this weekend, with most key terms of the Iran peace agreement already settled and an agreement expected in "one or two days."

Media commentary said the prospect of renewed US-Iran negotiations has prompted the market to reassess supply outlook. Other comments noted that signs of a potential US-Iran deal have pushed down the risk premium.

Analysts believe this shift means the previously priced-in "extreme supply disruption scenario" is being quickly removed from oil prices.

Oil Prices Shift From War Premium to "Fundamental Pressure"

With geopolitical risk cooling, focus in the oil market is returning to supply and demand fundamentals.

On one hand, if the strait remains open, oil exports from the Middle East will return to normal, significantly easing pressure on global supply chains. On the other hand, if US-Iran relations ease and sanctions are partially lifted, Iran’s oil exports could further recover, providing additional supply to the global market.

Morningstar cited analysis noting that if the conflict cools completely and normal transportation resumes, oil prices could gradually return to "pre-war levels"; the prior rise was mainly driven by risk premium, rather than a significant tightening of supply-demand fundamentals.

Furthermore, on the demand side, global economic growth prospects remain uncertain, and prior rapid increases in oil prices have already suppressed consumption to some extent, making oil prices more prone to quick corrections once geopolitical support fades.

Strait of Hormuz Eases Short Term; Uncertainty Remains

Despite Iran's announcement to open the Strait of Hormuz, the market remains cautious about its sustainability.

First, current US-Iran statements are mainly "policy signals"; the actual resumption of navigation still requires observation, including insurance, shipping company risk assessments, and changes in military situations. Second, regional conditions are not yet fully stable, and any sudden events could quickly push up the risk premium again.

Global Risk Management chief analyst Arne Lohmann Rasmussen stated, "The market is currently pricing in the end of the war and the reopening of the strait. However, we note that currently, the opening is only for ships sailing along the Iranian coastline, so it may not be fully open yet."

Some analysts pointed out that the market is quickly retreating from the "worst-case scenario," but has not fully entered a "stable supply" state, meaning oil price volatility may remain high in the short term.

Sevens Report Technicals editor Tyler Richey believes Friday’s sharp sell-off in the oil market may have been somewhat overdone, since details regarding a final and lasting ceasefire agreement between the US and Iran have not been fully resolved, and the current negotiations may still be more fragile than Friday's oil price movement would indicate.

Market Outlook: Oil Prices May Enter High-Volatility Range

According to a variety of institutional views, the future movement of oil prices will depend on two key variables:

Geopolitical Developments: If a ceasefire or substantive progress in negotiations is achieved, oil prices have further room to fall;
Pace of Supply Recovery: Including Iran’s exports, OPEC+ policy adjustments, and global inventory changes.

In the short term, the market has completed a round of intense risk repricing, and oil prices have shifted from “geopolitical-driven” to “fundamental-driven.” With uncertainties not fully eliminated, the oil market may enter a phase of high volatility, rapidly responding to policies and news.

Risk Warning and DisclaimerThe market carries risks; investments require caution. This article does not constitute individual investment advice, nor does it take into account the special investment objectives, financial situation, or needs of some users. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their own specific circumstances. Any investment made on the basis of this article is at the investor's own risk. ```