Oil: Sharp drop of up to 11% as geopolitical risk in the Middle East declines (video)

International markets oil have reported a sharp turnaround, as the geopolitical backdrop in the Middle East shows signs of de-escalating and concerns about supply disruptions ease significantly. The easing of tensions around the Strait of Hormuz, coupled with signs of progress in the US-Iran talks and temporary ceasefires in the region, led to a rapid unwinding of the “risk premium” that had been embedded in prices. As a result, Brent and WTI posted strong losses, with investors re-pricing the potential for more stable crude oil flows and reduced risk of energy turmoil at the global level.

Crude oil prices fell about 9% on Friday, after Iran announced that the passage of all commercial ships through the Strait of Hormuz remains open for the remainder of the ceasefire, while at the same time President of the United States Donald Trump said that Tehran has agreed not to close the crossing again.

Market shakes off excessive risk premium

Brent futures fell by 9,01 dollars, or 9.07%, to close at $90.38 per barrel, after earlier touching an intraday low of $86.09. U.S. West Texas Intermediate fell $10.48, or 11.45 percent, to $83.85 per barrel, having retreated as low as $80.56.

Both contracts posted their biggest daily decline since April 8.

All ships can transit the Strait of Hormuz, but this requires coordination with Iran’s Islamic Revolutionary Guards, a senior Iranian official said, adding that the release of Iranian funds is part of the deal.

“As the market is now quickly shaking off the excessive risk premium that was built in over the past two weeks, crude is returning to a valuation that reflects normalization of flows rather than disruption risk,” analysts at Gelber & Associates said.

Progress in negotiations

According to vessel tracking data, about 20 tankers were heading out of the Persian Gulf to exit through the Strait of Hormuz.

Progress is also being recorded in negotiations, as the United States and Iran have reportedly moved forward with talks on a three-page memorandum of understanding aimed at ending the war, according to an Axios reporter.

Trump also said in a telephone interview that the U.S. would enter Iran “at a leisurely pace” to recover enriched uranium and transport it to the United States.

At the same time, Israel and Lebanon agreed Thursday to a 10-day cease-fire, which went into effect. Israel has launched attacks in Lebanon as part of a military operation against Hezbollah, an organization with close ties to Iran, with the conflict complicating U.S.-Iran negotiations.

Both sides seek to create conditions for lasting peace

Trump also said Israeli Prime Minister Benjamin Netanyahu and Lebanese President Joseph Aoun would be invited to the White House for talks, which he described as the first substantive ones between the two countries since 1983.

The State Department said the two sides seek to create conditions for lasting peace, including mutual recognition of sovereignty, enhanced border security and affirmation of Israel’s right to self-defense.

Prices had already retreated earlier in the session as expectations of new talks between the U.S. and Iran over the weekend, coupled with a 10-day cease-fire between Lebanon and Israel, reinforced investors’ assessment that the Middle East war may be nearing its end.

Referring to one of the key points of friction, Trump noted that Tehran has proposed not possessing nuclear weapons for more than 20 years.

“We’ll see what happens. But I think we’re very close to a deal with Iran,” Trump told reporters outside the White House on Thursday.