Oil risk premium persists as Hormuz traffic slows

Crude oil prices were on track to record a weekly gain on Friday as renewed tensions between the United States and Iran earlier in the week continued to support prices despite growing confidence that both countries could eventually return to diplomatic negotiations.

At the time of writing, international benchmark Brent crude was trading at $76.23 per barrel, while US benchmark West Texas Intermediate (WTI) stood at $72.07 per barrel.

The gains, however, remained relatively modest compared with the sharp decline recorded over the previous four weeks, which erased most of the geopolitical premium built during the conflict and pushed oil prices back to pre-war levels and, in some cases, below them.

The subdued market reaction suggests traders remain focused on expectations of ample global crude supply, amid reports that major Persian Gulf exporters have accelerated shipments in a bid to move barrels to market before any further escalation disrupts trade routes.

Several producers in the region have reportedly rushed to load crude cargoes onto tankers, offering discounts to buyers to speed up deliveries and reduce exposure to potential shipping disruptions.

Analysts said the market continues to attach a geopolitical premium to oil prices because of lingering uncertainty over the security of shipping routes through the Strait of Hormuz, through which roughly one-fifth of global oil supplies move.

“Prices have backed off the mid-week highs, but there is still a substantial risk premium as Hormuz transits are back to a near-standstill with no clear signs on when normal reopening might resume,” said Vandana Hari, founder of Vanda Insights.

“However, it looks like market confidence in the US and Iran returning to diplomacy to resolve the issue is capping the upside,” she added.

Market sentiment appears to be anchored on expectations that Washington and Tehran will eventually return to negotiations despite renewed hostilities, limiting the extent of recent price increases.

Even comments by US President Donald Trump declaring the ceasefire with Iran over, alongside Washington’s decision to reimpose sanctions on Iranian crude exports, failed to trigger a more significant rally in oil prices.

According to Warren Patterson, commodity strategist at ING, shipping activity through the Strait of Hormuz remains significantly below levels recorded before the conflict.

“Vessels transiting the Strait of Hormuz remain well below pre-war levels,” Patterson said.

“And recent developments show that safe passage of vessels is still an issue facing the market,” he added.

He noted that despite the use of alternative export routes and a partial easing of Iran’s restrictions on maritime traffic, crude oil exports from the Middle East have averaged around 14 million barrels per day, down sharply from approximately 20 million barrels per day before the conflict began.

The continued disruption to shipping activity has kept a geopolitical risk premium embedded in oil prices, although expectations of a diplomatic breakthrough between Washington and Tehran continue to limit further gains.