Oil Market May Be Ahead of Itself Amid Middle East Uncertainty

The market's recent oil selloff may be premature, warn analysts. Crude oil prices have dipped by more than 12% from last week's highs, with the US benchmark West Texas Intermediate (WTI) barrel hovering near $80. However, experts at ING caution that investors are overenthusiastic about a fragile truce in the Middle East.

Commodity analysts at ING point out that President Donald Trump signaled 'a good chance' of a deal, but also warned that strikes would resume if negotiations fail. To sustain lower oil prices, traffic through the Strait of Hormuz must recover and the market must price in a significant risk premium, given recent events.

Societe Generale agrees that a return to pre-war levels is ambitious without 'fully-fledged commitment to peace' and re-opening the strait. The bank estimates that each month without a lasting resolution adds at least $10/bbl to Brent prices, highlighting Trump's warning of resumed strikes if no new ceasefire deal is reached.

Rabobank echoes this sentiment, noting that energy prices have fallen by around $10/bbl from last week but remain vulnerable to re-escalation and persistent disruptions to the Strait of Hormuz. MUFG emphasizes that Middle East tensions can escalate quickly, providing a breather for Asian currencies only temporarily.