Oil market reverses after six days of gains, market overestimates Iran risks
Oil prices are ending the last trading week of August noticeably below last Friday's levels. After a six-day rally, the market turned downward due to less stringent than expected US sanctions against Iran and hopes for a gradual resumption of traffic through the Strait of Hormuz. At the same time, at the end of the week the decline was limited by new geopolitical risks, in particular the escalation of Russia's war against Ukraine.
As of Friday morning, August 28, Brent futures are trading at approximately $88.4 per barrel, with US WTI at around $83.2 per barrel.
By comparison, last Friday Brent closed at $94.39 and WTI at $87.06 per barrel. Thus, over the week the international benchmark became cheaper by about 6.4%, and US crude by 4.4%.
Even if measured not from last Friday but from Monday's close, the decline remains noticeable. On August 24, Brent was at about $92.17 and WTI at $85.01. By Friday they lost approximately 4.1% and 2.1% respectively.
At the start of the week the market sharply changed direction
As recently as last week the situation looked completely different. Brent rose for six consecutive sessions and added about 6.6% over the week, WTI almost 7%. Investors had priced in the risk of further escalation of the US-Iran conflict and prolonged disruptions to oil transportation through the Strait of Hormuz.
However, on Monday the trend reversed. Brent and WTI fell by about 2.4% each after Washington released details of its new campaign of economic pressure on Iran.
Paradoxically, the new sanctions did not push oil higher. The market had expected much tougher measures, including quick pressure on Tehran's main trading partners. When it became clear that the White House had not yet resorted to the most aggressive scenario, part of the geopolitical premium began to disappear from prices.
The decline accelerated on Tuesday. Brent fell below $88 and WTI near $82 per barrel. Investors increasingly anticipated that Washington's economic pressure might lead not to new military escalation but to negotiations.
The Strait of Hormuz was the key factor of the week
Additional pressure on prices came from negotiations between Iran and Oman over shipping through the Strait of Hormuz, a key route for oil exports from the Persian Gulf.
The parties discussed creating a temporary maritime corridor, and later reported an agreement on the distribution of revenues related to the use of the strait. This reinforced expectations that oil flows from the region could gradually normalize.
According to data cited by Trading Economics referencing Goldman Sachs, oil exports from the Persian Gulf have already recovered to about two-thirds of pre-war levels. Total shipments are estimated at 15-16 million barrels per day—well above the lows of 5-6 million barrels recorded in the spring.
At the same time, a full opening of Hormuz is still absent. Iran emphasizes that its agreements with Oman do not by themselves guarantee an immediate return of shipping to normal conditions.
Midweek Brent dropped to $86
By Wednesday the decline had continued for a third consecutive session. Brent at one point traded near $86 per barrel, while WTI approached $80. These were the lowest levels in about two weeks.
An additional factor was data on inventories in the US. Commercial crude oil inventories rose by about 95 thousand barrels—the fourth consecutive weekly increase.
However, the decline did not turn into a full-scale rout. Gasoline and diesel inventories in the US remain low for this time of year, and global supply still depends on the situation in the Middle East.
Russia's war against Ukraine returns part of the risk premium
On Thursday oil sharply recovered part of the losses. Brent rose to about $89.7 and WTI to $83.5 per barrel.
One reason was a shift in traders' attention: in addition to the Middle East, the market began to assess risks to supply from Russia again. Concerns increased amid reports of a lack of progress in diplomatic efforts to end the war and possible further escalation.
A separate factor remains Ukrainian strikes on Russian refining and port infrastructure. Damage to refineries and export facilities may limit Russia's ability to supply oil and petroleum products to foreign markets.
What happened to oil prices on August 28
On Friday the market found itself effectively between two opposite scenarios. On the one hand, increased flows through the Persian Gulf and diplomatic contacts around Hormuz reduce the risk of shortage and keep oil from returning to levels above $90-94.
On the other hand, Washington made clear to mediators that it is not interested in returning to the previous terms of its agreements with Iran. This reduces the chances of a quick political settlement and full normalization of operations in the Strait of Hormuz.
As a result, after a very volatile week Brent remains near $88 per barrel, while WTI is around $83. That is well below last Friday's highs but also above the lows reached in the middle of this week.
Thus, the main outcome of the week was not the complete disappearance of the geopolitical premium but its substantial reduction: the market no longer prices in the most pessimistic scenario for supplies from the Persian Gulf, yet it does not consider the risk of disruptions eliminated.
Based on materials from: Trading Economics, The Wall Street Journal, MarketWatch
