Oil prices are expected to come down further after the US and Iran reached an interim agreement to reopen the Strait of Hormuz, reducing fears of supply disruptions through one of the world's most critical energy chokepoints, according to commodities analyst Anuj Gupta.
Brent crude has fallen to around $82 a barrel after Washington and Tehran announced a deal aimed at ending hostilities and restoring maritime traffic through the Strait of Hormuz, a route that carries roughly a fifth of global oil supplies.
Crude prices correct
"In the last two months, crude prices have corrected by almost 27 per cent," Gupta said in an interview to The Federal. Following announcements by the US and Iran that they were moving toward ending the conflict, "crude oil corrected by almost 7 per cent to 8 per cent" and is now trading near three-month lows, he said.
The market's reaction reflects expectations that oil exports from the Gulf region could normalise if the agreement holds. Gupta said the reopening of the Strait of Hormuz would improve crude availability and help ease concerns about supply shortages that had supported prices during the conflict.
"The Strait of Hormuz is an important point where nearly 20 per cent of world oil supply moves," Gupta said. The agreement to reopen the waterway could lead to a recovery in shipments to major Asian consumers including India, China and Japan, he added.
Time to stabilise
While the deal has improved sentiment, Gupta cautioned that a full normalisation of energy flows would take time.
"It will take one or two months to be on the same line," he said, pointing to the need to clear sea mines and resolve operational issues before shipping can return to pre-crisis levels.
The reopening of Hormuz could also help reduce freight and transportation costs that surged during the conflict as shipping companies rerouted vessels and faced higher insurance premiums.
"After the opening of the Strait of Hormuz, you will see sharp supplies begin," Gupta said. Lower transportation costs would further support the decline in crude prices, he added.
OPEC factor
The outlook for oil will also depend on production decisions by members of the OPEC+ alliance. Gupta said producers are unlikely to cut output given lingering uncertainty around the agreement and broader geopolitical risks.
"OPEC+ members will increase production because the situation is still not clear," he said, adding that the UAE has also signalled a willingness to raise output.
If the agreement holds and supply routes normalise, Gupta said crude could fall further.
"The price will come down towards $75 to $70 per barrel," he said. However, he cautioned that any renewed disruption in the region could quickly reverse the decline.
