Oil prices continue to exhibit high volatility, fluctuating in response to developments in the Iranian conflict. Last week, we detailed the historic surge recorded in March. Brent crude advanced by 41.6%, a month also marked by an unprecedented spread between the two primary global benchmarks, Brent and WTI. On March 19, this gap reached $20.
Following this historic rally, oil recorded its sharpest weekly decline since 2020. This reversal followed Donald Trump's announcement of a ceasefire late Tuesday night. The truce offers the market a glimpse of a potential reopening of the Strait of Hormuz and a gradual return to more normalized supply chains.
However, despite the significant pullback in prices, a return to normalcy will likely be protracted. Gulf nations were forced to halt part of their production—in addition to the infrastructure damaged by Iranian strikes—as storage capacities reached their limits. While all eyes are on the exit of the Strait of Hormuz, other vessels must also be able to enter the strait to drain these inventories.
The longer the shutdown persists, the more time is required to restore production levels. According to the Energy Information Administration (EIA), Middle Eastern oil production is expected to decline by 9.1 million barrels per day in April, following a 7.5 million barrel drop in March.
While Saudi Arabia reports only a 25% decline in production and possesses the resources to ramp up quickly, the situation is far more challenging for Iraq. Production there has plummeted by 80% since the start of the war. Furthermore, the Iraqi oil industry is heavily dependent on foreign personnel, who will only return once the security situation has stabilized.
Although the market anticipates an end to the conflict and the reopening of the Strait of Hormuz, the road ahead is fraught with complexity. In late 2023, Yemen's Houthis attacked vessels in the Red Sea in retaliation for Israeli strikes on the Gaza Strip, actions that paralyzed maritime traffic in the region. Since then, traffic through the Bab el-Mandeb Strait has yet to return to pre-crisis levels.
Prior to the conflict in Iran, 20 million barrels of oil transited daily through the Strait of Hormuz, which was considered an international waterway. However, Iran may maintain control over the strait after the conflict ends. According to the Financial Times, Tehran is reportedly considering a transit fee of 1 dollar per barrel, payable in cryptocurrency.
