Ceasefire cools oil’s Hormuz war premium

Oil prices fell sharply on Tuesday after US President Donald Trump said he had agreed to a two-week ceasefire with Iran, tied to the immediate and safe reopening of the Strait of Hormuz, easing fears of a prolonged supply shock through one of the world’s most important energy chokepoints. Reuters reported Brent crude was down 13.3 per cent at $94.76 a barrel in early Wednesday trade in Asia, while West Texas Intermediate fell 15.2 per cent to $95.79. That means the market move was steep, but not quite the 18 per cent slide to below $93 described in some early accounts.

Trump announced the pause less than two hours before a deadline he had set for Tehran to reopen the strait or face attacks on civilian infrastructure. On Truth Social, he described the arrangement as a “double sided CEASEFIRE”, while Iran’s foreign minister, Abbas Araqchi, said Tehran would halt counter-attacks and allow safe passage through the waterway if strikes against Iran stopped. Pakistan’s prime minister, Shehbaz Sharif, and military chief, Field Marshal Asim Munir, were identified by Reuters as key mediators in the last-minute diplomatic effort.

The Strait of Hormuz handles about one-fifth of global oil shipments, making any disruption there immediately relevant to inflation, freight costs and investor sentiment far beyond the Gulf. The prospect of the waterway reopening changed the market mood within hours because traders had spent weeks pricing in the risk of a deeper supply crisis. Reuters said the US-Israeli war with Iran had already driven the steepest monthly rise in oil prices on record in March, at more than 50 per cent, while the closure of the strait had left roughly 130 million barrels of crude and 46 million barrels of refined fuel floating on about 200 tankers in the region.

Tuesday’s drop followed an extraordinary run-up in physical oil markets. Reuters reported that some immediate-delivery crude grades in Europe and Asia had been trading near $150 a barrel as refiners scrambled for replacement barrels outside the Gulf. North Sea Forties crude hit an outright record of $146.09, while S&P Global’s dated Brent assessment rose to $144.42, surpassing the previous 2008 peak. Analysts cited by Reuters said panic over prompt supply, rather than the longer-dated futures market, had become the main force driving prices higher.

That distinction matters because futures prices alone can understate the severity of a physical shortage. While headline benchmarks were surging, the real squeeze was showing up in cargoes needed immediately by refiners, airlines and fuel distributors. European jet fuel prices were near record highs and diesel remained elevated, underlining why a ceasefire can calm financial markets faster than it can repair supply chains. Reuters also quoted IATA Director General Willie Walsh as saying jet fuel supply could take months to recover even if crude movements through Hormuz normalise, because refining disruptions across the region will take longer to unwind.

Financial markets responded as expected to the de-escalation. Reuters reported a relief rally across risk assets, with stocks advancing and the dollar weakening in Asian trade, while the rupee strengthened and volatility expectations eased before the Reserve Bank of India’s policy decision. For large oil-importing economies, any sustained retreat in crude offers breathing room on inflation, fiscal balances and transport costs. Yet analysts cautioned that part of the geopolitical premium may remain embedded in prices because the truce is temporary and because Iran has demonstrated how quickly it can threaten a route central to global energy trade.

That caution was visible even as the ceasefire was announced. Reuters said several Gulf countries activated air defences or issued warnings after missile and drone threats, while Israeli media reported further launches from Iran after Trump’s statement. Lebanon was also left outside at least part of the arrangement, with continued strikes reported there. The fragility of the pause helps explain why analysts stopped short of calling the sell-off a return to normality. It is better understood as a rapid repricing from worst-case disruption towards guarded optimism.