WTI crude oil falls below $70: Geopolitical premium completely wiped out, "double whammy" of inflation and rate hike expectations

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International oil prices plunged sharply on Wednesday. U.S. WTI crude oil futures fell below the $70 mark, and Brent crude oil hit the lowest level since the eve of the Iran war. As stranded oil tankers gradually left the Strait of Hormuz, market expectations for the return of Iranian supply quickly intensified, and the war premium dissipated rapidly.

WTI crude oil futures dropped 4.6% in a single day to $69.87 per barrel, the lowest since March 2; Brent crude oil fell $3.42 to $73.65 per barrel, with an intraday low of $73.22, approaching the closing price on February 27—the day before the U.S. and Israel launched airstrikes on Iran.

The drop in oil prices pulled down U.S. Treasury yields in tandem, with the 10-year yield dropping to 4.407%, falling back to the level before the Federal Reserve announced stronger-than-expected rate hike projections last week, and inflation concerns eased significantly.

Meanwhile, falling oil prices are reshaping global monetary policy expectations. Nomura Securities and RBC Capital Markets both lowered their interest rate hike projections for the European Central Bank on Tuesday. The eurozone one-year inflation swap rate has plummeted from nearly 3.90% a month ago to 2.45%, and the UK two-year inflation swap rate has also dropped back to pre-war levels.

The rapid decline in energy prices is providing policy space for central banks previously caught in a “double spiral” of exchange rate and inflation pressures.

Hormuz Unblocked: Stranded Oil Tankers Gradually Depart

According to Reuters, citing shipping data, three oil tankers were sailing out of the Strait of Hormuz on Wednesday, carrying a total of about 5 million barrels of crude oil, with two destined for Asia. Previously stranded crude oil cargoes in the Gulf region are gradually being released as the U.S.-Iran interim agreement is implemented.

Oman has announced that the Strait of Hormuz will remain open to shipping, with no transit fees charged, and has designated temporary routes on both the north and south sides of the existing channel to ensure safe passage of vessels.

Physical crude oil market performance confirms the sharp shift in supply expectations—spot premiums and discounts for crude oil worldwide have all turned to discounts, and trading flows are changing accordingly. Tim Waterer, Chief Market Analyst at KCM Trade, stated:

"Although this is only an early signal, the market is already pricing in the return of Iranian oil to the global market and the overall scenario of the Strait of Hormuz returning to normal."

He further pointed out:

"If sanctions are eased, due to large amounts of oil stored on tankers, Iranian production and exports could increase quite quickly—we're probably talking about a time window of weeks rather than months."

Supply Expectations Dominate Pricing, Geopolitical Premium Fades Rapidly

The core driver behind this round of oil price declines is the market pricing in Iranian oil supply returning on a large scale. Washington has granted Tehran a 60-day sanction waiver, allowing Iran to sell oil during negotiations; tensions in Lebanon have also eased simultaneously. The combination of these two factors has quickly erased the geopolitical risk premium that previously supported oil prices in the short term.

In terms of scale, Brent crude oil has fallen more than 40% from wartime highs, and European natural gas has dropped as much as 45% from its war peak. In a media interview, John Conlon of Greenlight Commodities said, if Iranian oil continues to enter the market, oil prices could move further toward the $60 range.

However, the sustainability of the U.S.-Iran agreement remains uncertain. On Tuesday, Trump said that Iran had agreed to accept "indefinite" inspections, but Tehran denied making such a concession. Mark Malek, Chief Investment Officer at Siebert Financial, warned:

"The market is currently too confident in a favorable outcome, and is underpricing the risks that unresolved nuclear issues and disputes over inspections imply."

Inflation Expectations Cool, Global Monetary Policy Expectations Repriced

The rapid decline in energy prices is systematically changing global central banks’ policy path expectations, directly offsetting the inflationary pressures previously worsened by soaring oil prices.

In Europe, Nomura Securities and RBC Capital Markets both lowered their rate hike projections for the European Central Bank on Tuesday—Nomura previously expected three hikes, now adjusting to two; RBC expects only one hike. RBC economists wrote, "the inflation environment has changed substantially," and eurozone inflation dynamics may "mean-revert relatively rapidly."

Market data also supports this view: the eurozone’s one-year inflation swap rate has fallen from nearly 3.90% a month ago to 2.45%, and the five-year rate has declined about 50 basis points, close to the ECB’s 2% target range.

The UK’s two-year inflation swap rate has returned to pre-war levels, and the UK interest rate futures market now expects only one rate hike by the Bank of England this year, down from three expected two months ago.

In the U.S., the 10-year Treasury yield slipped to 4.416% as oil prices fell, slightly lower than before the Fed released its stronger-than-expected rate hike forecasts last week; the 2-year Treasury yield, which is more sensitive to short-term rate trends, was quoted at 4.152%, still slightly higher than before the Fed’s statement, indicating that the market has not fully adjusted its pricing for the near-term rate path.

The sharp drop in oil prices and the fall in Treasury yields together lifted market sentiment that day. The Dow Jones Industrial Average rose by more than 1%, or about 550 points; the Nasdaq Composite, which had dropped 4% over the previous two days on concerns about an AI valuation bubble, rebounded 0.8%.

The drop in energy prices has also to some extent eased exchange rate pressures for energy-importing countries in Asia. According to Reuters, several triggers for Japan’s previous foreign exchange interventions have partially failed to be met after Brent crude oil fell below $75.

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