Hostilities in West Asia may have eased, but oil prices remain well above pre-war levels. Though prices have stayed below $100 a barrel since the ceasefire announcement, conflicting signals from the US and Iran are keeping markets volatile.
Mint looks at the near-term outlook.
Haven’t oil prices declined in recent days?
Yes. After surging to over $110 a barrel at the peak of the conflict, oil prices moderated following the ceasefire announcement. However, they remain above pre-war levels of around $65 a barrel.
For instance, benchmark Brent crude, which traded at about $74 a barrel before the US-Israeli strikes on Iran in late February, rose to a high of $107 when Iran effectively shut the Strait of Hormuz and key oil infrastructure in the region came under attack. Prices eased after the ceasefire, and on Friday Brent traded at $87 a barrel after Iran indicated that the strait had reopened.
What has happened since then?
On Saturday, Iran once again shut the Strait of Hormuz, a critical route for about 15% of global oil trade, after objecting to continued US restrictions on vessels linked to its ports. According to news reports, a couple of ships were attacked over the weekend, further escalating tensions. Vessel movement has come to a near halt, and oil prices are therefore expected to rise when markets reopen on Monday.
While both sides have publicly claimed progress in talks, experts caution that a final deal remains distant, with the ceasefire set to end on Wednesday.
Where do the disagreements lie?
The US has demanded that Iran hand over its stockpile of enriched uranium and halt all enrichment activities within its territory for an extended period. It is also seeking firm assurances that Iran will not shut the Strait of Hormuz again in the future. Iran has rejected these demands.
In turn, Tehran is pushing for the unfreezing of more than $100 billion of its assets held overseas and a complete removal of economic sanctions imposed by the US and its allies.
Why are oil prices unlikely to cool soon?
There are several reasons. First, the gap between the two sides suggests that a comprehensive peace deal is unlikely anytime soon. Second, uncertainty over whether the ceasefire will hold or hostilities could resume continues to weigh on market sentiment. Third, the Strait of Hormuz must remain open consistently for shipments to resume at scale.
Experts say that it could take weeks to clear accumulated inventories and move stored oil. Only after that can shut-in oil wells be brought back online, a process that takes time. Damaged oil infrastructure will also need repairs before production can return to pre-war levels.
How is this affecting the global economy?
The International Monetary Fund (IMF) has warned that the West Asia conflict is driving up energy and food prices across the world, adding to inflationary pressures and weighing on economic growth. It has also warned that the conflict risks pushing up government borrowings, which as a share of gross domestic product is set to touch 100% by 2029, a level not seen since the second world war.
For India, prolonged disruption could translate into slower growth if high energy prices persist.