Oil volatility hinges on Hormuz, talks outcome: Analysts

Oil markets are experiencing relative stability near $95–$97 per barrel, amid indications that the US and Iran may move toward extending the ceasefire and resuming talks. This reflects markets increasingly pricing in de-escalation scenarios, despite ongoing tensions in the Strait of Hormuz.

Several analysts told Argaam that the market is currently moving under the influence of real supply constraints, while continuing to factor in a war premium. At the same time, there is cautious optimism about the possibility of reaching diplomatic solutions. However, continued pressure on supply is keeping prices underpinned at elevated levels.

Fluctuating between $96 and $102… Oil prices supported by supply constraints and the Strait of Hormuz

Ali Al Riyami, former Director General of Oil Marketing at the Ministry of Energy and Minerals in Oman

Ali Al Riyami, former Director General of Oil Marketing at the Ministry of Energy and Minerals in Oman, said that oil prices are currently moving within a volatile range due to geopolitical developments. “Prices rose to around $101–$102 per barrel amid stalled negotiations, before declining to about $96 as talks of their resumption emerged,” he said.

“The market is experiencing a state of contradiction between two scenarios: the continued closure of the Strait of Hormuz and the success of negotiations. The price difference between these scenarios is relatively limited—possibly not exceeding about $10—despite the significant difference in their fundamental impacts. This reflects that prices are still driven more by supply factors than expectations,” Al Riyami added.

The analyst further pointed out that the continued closure of the strait, along with the possibility of a maritime blockade on Iran, could remove approximately 1.7 million barrels per day from the market, further tightening supply and supporting prices remaining around $95–$100.

He noted that geopolitical factors and supply dynamics have become fully intertwined, as disruptions affecting 50% to 70% of supply could pressure global demand and potentially lead to slower economic growth—or even a global recession—if the current situation persists.

Li Xing, Financial Markets Strategist Consultant to Exness

Li Xing, Financial Markets Strategist Consultant to Exness, said that the price level for energy products will largely depend on the developments in the Middle East and the outcome of the current diplomatic efforts.

Oil prices could remain elevated for some time as the disruptions remain present, including the closure of the Strait of Hormuz and lower output. Several countries have been forced to reduce their production levels due to the inability to export through the Strait of Hormuz, and after their storage reached capacity, which could leave the market constrained even after the resolution of the tensions, she added.

In the meantime, oil prices could climb further if conditions deteriorate or supply disruptions remain acute for a long period of time. In this scenario, shortages could become more widespread globally, and prices could surge as consumers compete for available supply. If tensions decline and a diplomatic breakthrough materializes, oil prices could decline gradually as conditions in the physical energy market return to normal, output increases to previous levels, and shipping resumes in a significant manner, according to Li Xing.

Li Xing also explained that comments from several officials converge to a certain extent and point to the possibility of elevated oil prices if conditions on the ground continue to tighten the market, and could recede once a resolution is reached and shipping is active again.

Michael Brown, Senior Research Strategist at Pepperstone

Michael Brown, Senior Research Strategist at Pepperstone, said that, while markets at large are increasingly moving on from day-to-day geopolitical noise, and instead focusing on the broader direction of travel, which remains towards a peace deal being struck, the outlook for crude is somewhat different.

“Principally, this owes to the fact that while assets like equities and bonds can shift focus on a sixpence, the crude market is driven primarily by actual supply dynamics, where significant constraints persist, not only as a result of the closure of the Strait of Hormuz, but also due to ongoing production shut-ins in the Gulf due to lack of storage,” he said.

War Premium Already Priced In… Prices May Rise Further

Al Riyami also explained that current oil prices already reflect a “war premium,” noting that any further increases would require more significant developments than the current situation—such as direct targeting of the energy sector in the region.

The market has not yet priced in the worst-case scenarios. Current levels of $100–$105 per barrel reflect the present situation, while prices could rise to around $120 in the case of moderate escalation, and may exceed $150 only in the event of severe escalation involving direct attacks on production facilities, he added.

Moreover, Al Riyami emphasized that continued escalation—even during negotiation periods—creates uncertainty in the markets, which react quickly to news, thereby supporting price volatility. He stressed that the Strait of Hormuz should be a priority in any negotiations due to its direct link to global supply security.

In the meantime, oil prices could remain volatile as market participants react to new developments. Overall, markets remain optimistic but cautious amid the current developments and hopes that the US and Iran could reach an agreement, according to Li Xing.

“Still, the significant backwardation of the curve suggests that both that the market continues to place a significant premium on prompt deliveries, but also that said supply constraints could well prove to be relatively short-lived, in the grand scheme of things,” Brown stated.

Post-Crisis… Prices Will Not Return to Previous Levels

Al Riyami stated that talk of prices peaking above $105 per barrel reflects a scenario of escalation rather than de-escalation, as reaching such levels would require the continuation of the war and a prolonged closure of the Strait of Hormuz.

Li Xing also said that, if tensions decline and a diplomatic breakthrough materializes, oil prices could decline gradually as conditions in the physical energy market return to normal, output increases to previous levels, and shipping resumes in a significant manner.

In addition, it seems plausible that the post-conflict price floor will be a higher one than we had pre-conflict, owing to the need to price a structurally higher geopolitical risk premium, the vagaries around how long it will take for production to return to normal levels, and elevated demand stemming from a need to rebuild strategic reserves that have been drawn down over the last few weeks, Brown stated.

He noted that the market is also unable to price a return to 'normality' given the aforementioned supply constraints.

According to Brown, the US administration is clearly in favor of lower energy prices, principally gasoline, considering not only the potential economic damage that a sustained price rise may cause, but also bearing in mind this November's midterms, where $4 or $5 per gallon gas prices could spell disaster for the GOP at the ballot box.

“Frankly, I'd be paying much more attention to physical dynamics, and the actual situation 'on the ground', as opposed to any jawboning from the US administration or their surrogates,” he added.