Oil prices surged on Monday, fueled by renewed supply fears after US President Donald Trump rejected Iran’s latest proposal as „unacceptable,“ keeping the global market tight amid the continued closure of the vital Strait of Hormuz.
Experts believe that the oil market remains heavily headline-driven.
“One would expect the market to become increasingly fatigued by the deluge of headlines and the back-and-forth,” Warren Patterson, head of commodities strategy at ING Economics, said in a note.
“However, oil prices remain highly sensitive to noise around Iran, highlighting the significance of the ongoing supply disruptions in the Persian Gulf.”
Both Brent and West Texas Intermediate crude oil contracts were back above $100 per barrel on Monday.
WTI prices were up 4.9% at $100.10 per barrel, while Brent was at $105.56 a barrel, up 4.2%.
Hopes for an imminent resolution to the 10-week-old conflict, potentially allowing oil transit through the Strait of Hormuz, led to both contracts recording 6% weekly losses last week.
Political focus shifts to China
According to US officials, Trump is expected to discuss topics including Iran with Chinese President Xi Jinping when he arrives in Beijing on Wednesday.
„Market attention now shifts squarely to President Trump’s visit to China this week,“ IG market analyst Tony Sycamore said in a note.
There is hope he can persuade Beijing to leverage its influence over Iran to push for a comprehensive ceasefire and a resolution to the ongoing disruption in the Strait of Hormuz.
Saudi Aramco CEO Amin Nasser stated on Sunday that global oil markets will require time to stabilize, even if supply flows restart, following the loss of approximately 1 billion barrels of oil over the last two months.
This instability is highlighted by a growing trend in Middle East oil exports: last week, two more crude tankers turned off their trackers while exiting the Strait of Hormuz, according to Kpler shipping data, a move undertaken to evade potential Iranian attacks.
“Even in the event of an agreement, however, oil prices are likely to fall only limitedly at first, as a return to the old normal is not to be expected for now,” Barbara Lambrecht, commodity analyst at Commerzbank AG, said.
It is likely to take some time before shipping traffic in the strait normalises and production in the region returns to its usual level.
Although the expectation for an immediate deal is diminishing, there is still a slight possibility that discussions later this week between President Trump and Chinese President Xi could lead to favorable developments concerning Iran.
“The hope is that China can use its influence over Iran to push it closer towards a peace deal. Clearly, this is easier said than done,” Patterson said.
Long-term price outlook remains high
The Strait of Hormuz will likely remain a critical choke point for the foreseeable future, justifying a risk premium.
This is because ramping up production is slow, and both energy and export infrastructure have sustained damage.
All these factors suggest that even in the event of an agreement, the oil price will initially (and from our perspective even until the end of the year) settle at a noticeably higher level than before the Iran war.
The three energy agencies‘ new monthly reports later this week are expected to offer deeper insights into the fundamental factors influencing the oil market.
Consequently, both supply and demand forecasts are likely to undergo further downward revisions.
Despite the projected second-quarter impacts on both supply and demand, the International Energy Agency’s forecast in April made only minimal adjustments to its predictions for the second half of the year.
“However, the longer the Strait of Hormuz remains closed, the more lasting the effect on prices will be,” Lambrecht said.
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