Oil prices have been trending lower as markets factor in the possibility of an extension to the US–Iran ceasefire and renewed peace negotiations, despite ongoing disruptions to physical oil flows through the Strait of Hormuz [1]. ING analysts Warren Patterson and Ewa Manthey highlight that the physical oil market is tightening daily due to these disruptions, with an estimated 13 million barrels per day (b/d) affected, a figure that could rise further under the current US blockade [1].
A significant divergence has emerged between the futures and physical oil markets: dated Brent traded around $117 per barrel, while front-month Brent futures settled just below $95 per barrel on the previous day [1]. This gap underscores the market's anticipation of easing tensions, even as physical supply constraints persist. The analysts note that the main upside risk for oil prices would be a breakdown in peace talks between the US and Iran [1].
The disruption has led buyers to shift towards US barrels, tightening the domestic US market as long as Middle East supply issues continue. However, US drilling activity has shown minimal response since the onset of the conflict, aligning with EIA forecasts that project little change in US crude oil output for the year [1]. A meaningful increase in US oil production would require a pickup in drilling activity, which, according to the EIA, would only significantly impact output by 2027 [1].
Record US oil and refined product exports have also been noted, but the limited drilling response suggests that the US supply side is not yet reacting robustly to the tightening market conditions [1].
CONCLUSION
Despite tightening physical oil supplies due to disruptions in the Strait of Hormuz, oil futures have declined as markets anticipate a possible extension of the US–Iran ceasefire and renewed peace talks. The divergence between physical and futures prices highlights ongoing uncertainty, with the main upside risk being a breakdown in negotiations. US production remains steady, with limited drilling activity and no immediate supply response expected.