Oil Prices Plummet on Easing Tensions and Unwinding Risk Premia

Oil prices plummeted on Tuesday, falling to around $81 per barrel after declining by nearly 9% from last Friday's close near $89. The drop was driven by investors unwinding their risk premia in response to easing tensions in the Middle East.

The U.S. military has paused its activities in the region for several days, and while there is an opportunity for negotiations, Iran has stated that it is not currently engaged in direct talks with the United States.

Despite the decline, supply-side concerns remain a key factor influencing oil prices. The Strait of Hormuz, a critical shipping route, saw daily vessel traffic below normal levels over the weekend, and transportation costs are increasing due to rerouted exports.

The market is currently pricing in an expectation of easing supply risks, rather than an actual improvement in the physical market's supply-demand balance.