【Crude oil falls nearly 5% in a day as the Middle East war premium rapidly fades】
Brent $BZ and WTI $CL both plunged. The most immediate reason was that Trump signaled a pause in further military strikes against Iran. The market had previously priced in a hefty premium for potential Middle East supply disruptions, and is now starting to unwind it. Brent has already fallen about 16% over the past week, its worst weekly performance since the pandemic in 2020.
Middle East crude export flows are recovering, global supply is gradually loosening, and high oil prices are also curbing demand. JPMorgan estimates that global crude oil supply could exceed demand by around 1.4 million barrels per day in October. In other words, the decline in oil prices is not just due to easing war risks: the fundamentals of supply and demand are also starting to undermine the high prices seen earlier. That is the fundamental pressure behind this latest downturn.
For markets, lower oil prices help ease energy inflation, which in theory could give the Fed more room to maneuver and reduce costs for businesses. But with strong nonfarm payrolls data and interest rate expectations still tilted toward tighter policy, there is no reason to expect falling oil prices to immediately reverse the trajectory of risk assets. Crude oil is shifting from being priced on geopolitical conflict to being priced on supply and demand. As long as shipping through the Strait of Hormuz does not recover sustainably, the war premium could rebound.
Brent $BZ and WTI $CL both plunged. The most immediate reason was that Trump signaled a pause in further military strikes against Iran. The market had previously priced in a hefty premium for potential Middle East supply disruptions, and is now starting to unwind it. Brent has already fallen about 16% over the past week, its worst weekly performance since the pandemic in 2020.
Middle East crude export flows are recovering, global supply is gradually loosening, and high oil prices are also curbing demand. JPMorgan estimates that global crude oil supply could exceed demand by around 1.4 million barrels per day in October. In other words, the decline in oil prices is not just due to easing war risks: the fundamentals of supply and demand are also starting to undermine the high prices seen earlier. That is the fundamental pressure behind this latest downturn.
For markets, lower oil prices help ease energy inflation, which in theory could give the Fed more room to maneuver and reduce costs for businesses. But with strong nonfarm payrolls data and interest rate expectations still tilted toward tighter policy, there is no reason to expect falling oil prices to immediately reverse the trajectory of risk assets. Crude oil is shifting from being priced on geopolitical conflict to being priced on supply and demand. As long as shipping through the Strait of Hormuz does not recover sustainably, the war premium could rebound.