Global oil prices fell 1.5% to settle above $94 a barrel as fresh hopes emerged that elusive peace talks between the US and Iran may materialize after all. According to Bloomberg, the White House announced it was sending two envoys to Pakistan with the intention of talking with Iranian officials also slated to be in Islamabad. However, Tehran still sounded a pessimistic tone on the prospects for talks, creating continued uncertainty in the market. Despite the recent decline, WTI futures are still up 13% for the week, representing the biggest jump since the initial surge triggered by the war in early March. The mixed signals from both sides mean traders remain closely tracking whether peace talks will again take place and offer relief as the strait remains largely shut.
The escalating tensions have reached a critical juncture as Iran signalled it would skip a planned new round of talks, further clouding prospects for stability and a swift recovery in global oil flows. The US blockade of Iranian ports and Tehran's fluctuating stance on access to the strait have heightened uncertainty. Iran's IRGC fired on two India-flagged vessels attempting to transit Saturday before declaring the strait closed until the US lifts its naval blockade. The International Energy Agency has warned that energy shocks could worsen if the strait remains closed, highlighting the vulnerability of a system where a single chokepoint carries such a heavy burden. However, the market has not seen a more severe disruption thanks to a combination of existing buffers and the ability of other producers to step in.
The weekend's most dramatic development came when the US Navy destroyer USS Spruance fired several rounds from its 5-inch gun at the Iranian-flagged cargo vessel Touska on Sunday after the ship ignored six hours of warnings to comply with the blockade. US Marines then rappelled from helicopters and took custody of the vessel, with Trump announcing the seizure on Truth Social, calling it a situation that "did not go well for them." Iran's military called the seizure "maritime piracy" and warned retaliation would follow once the safety of the crew and their family members aboard was confirmed. The incident represents a significant escalation from the previous weekend when Iran reimposed restrictions on the strait, accusing the US of failing to lift its naval blockade despite the April 8 ceasefire terms. The USS Spruance had been deployed to the region as part of the US Navy's response to Iranian threats to close the strait.
Global oil markets are experiencing a sharp disconnect with physical crude trading at a premium of $20 to $50 per barrel, according to Sara Vakhshouri, Founder & President of SVB Energy International. As reported by CNBC TV18, this premium indicates a severe shortage of oil in the physical market. The divergence is particularly notable as benchmarks in the paper market remain much lower than oil traded at the physical level, creating what Vakhshouri describes as a historical level of backwardation between the two markets. Recent developments have heightened these concerns with increased naval activity as multiple nations have deployed additional vessels to the region, while war risk premiums for tankers have risen by 15-20% and some shippers reportedly evaluate longer routes around Africa. The Brent forward curve has shifted into stronger backwardation, where near-term contracts trade at a premium to later-dated contracts, with the spread between first-month and sixth-month Brent futures widening to $2.85 per barrel, its highest level since November 2023.
The immediate focus is on the fragile ceasefire between the U.S. and Iran, which is due to expire Wednesday, with the situation already deteriorating sharply. Any further escalation, such as reported attacks on tankers near the strait, would deepen the supply disruption, while progress toward a new diplomatic round could provide an off-ramp. Crude oil production in the Persian Gulf will take "a few months" to mostly restore" assuming a full reopening of Hormuz and no renewed strikes, according to Goldman Sachs analysts. The bank sees output being curtailed by about 14.5 million barrels a day, or more than 50% in April. Even a full reopening may still leave flows taking several months to normalize, creating additional tightness, especially in diesel and jet fuel, and forcing countries and companies to curb demand. Recent developments suggest traders are getting increasingly comfortable with the idea that the kinetic phase of the US-Iran conflict is ending, or has already ended, and that an economic war is becoming entrenched, as noted by Macquarie Group's Thierry Wizman.
