Oil tumbles 6% as Iran deal hopes trigger risk premium unwind, but analysts caution against complacency

Oil prices plunged around 6% on Wednesday after US President Donald Trump said negotiations with Iran were entering their final stages, prompting traders to unwind part of the geopolitical risk premium built into crude markets. Brent settled down $6.26 at $105.02/barrel, while WTI fell $5.89 to $98.26/barrel. Trump nevertheless warned that further attacks remained possible if Tehran failed to reach a deal.

Tehran is reportedly prepared to cooperate with neighbouring Gulf states to establish protocols for safe shipping traffic, although no concrete framework was outlined. Despite the sharp selloff, market participants remained cautious over whether negotiations would translate into a meaningful recovery in Middle Eastern supply flows.

Analysts warned that physical balances remain extremely tight even if diplomatic progress continues. Citi said Brent could still rise to $120/barrel as markets continue to underestimate the risk of prolonged disruption, while Wood Mackenzie warned prices could approach $200/barrel should the Strait of Hormuz remain largely shut through year-end. PVM analysts also cautioned that global oil inventories could fall to critically low levels despite recent market complacency.

Some signs of easing panic emerged in forward spreads, with Brent’s prompt premium narrowing to around $20/barrel from highs above $35/barrel last month. However, shipping activity through the Strait of Hormuz remains severely disrupted, with only a fraction of normal tanker traffic resuming despite several supertankers crossing on Wednesday after prolonged delays.

UAE ADNOC CEO Sultan Al Jaber said it would take at least four months to restore flows to 80% of pre-conflict levels, reinforcing expectations that global markets will continue relying heavily on strategic and commercial inventories to offset ongoing supply shortages.

Written by: Farid Muzaffar