Hopes for a temporary ceasefire between the United States and Iran have triggered a sharp drop in oil prices, but analysts warn that the physical oil market remains under severe strain, with supply disruptions likely to persist even if tensions ease.
A planned two-week ceasefire and the start of negotiations between Washington and Tehran may represent the first meaningful attempt to de-escalate a rapidly intensifying conflict. However, the outlook for global energy markets remains highly uncertain, as structural disruptions continue to ripple through supply chains.
Crude oil futures reacted immediately to news of potential talks. Brent crude contracts fell as much as 16% in early Asian trading on Wednesday, dropping to $91.70 per barrel after closing at $109.27 the previous day.
The sharp selloff reflects a wave of relief among traders, particularly following earlier threats by U.S. President Donald Trump to target Iran’s critical infrastructure. The delay in escalation has temporarily eased fears of a broader disruption to global energy supplies.
Markets are also responding to optimism that flows of crude oil, refined products, and liquefied natural gas could resume through the Strait of Hormuz, a vital artery for global energy trade.
Yet, analysts caution that this optimism hinges on a critical uncertainty: whether negotiations will produce a lasting agreement.
The proposed ceasefire is expected to last two weeks, with negotiations set to begin in Pakistan and potentially extend beyond the initial timeframe if progress is made.
While the talks offer a pathway toward de-escalation, both sides remain far apart on key issues. Iran’s reported 10-point proposal includes provisions that would effectively consolidate its control over the Strait of Hormuz, a move likely to face strong opposition from the United States and its allies.
Control of the strait, along with unresolved concerns surrounding Iran’s nuclear program, is expected to be among the most contentious topics in the negotiations.
The uncertainty surrounding these issues means that the recent drop in oil prices could prove temporary if talks fail to deliver tangible results.
Despite the decline in futures prices, the physical oil market tells a very different story. Supply disruptions caused by the effective closure of the Strait of Hormuz are already working their way through global supply chains.
Asia, in particular, is experiencing significant stress as refiners struggle to secure sufficient crude supplies. Even if the strait reopens fully, it could take months for normal trade flows to resume.
The mismatch between futures market optimism and physical market realities highlights the complexity of the current situation. Traders may be pricing in a best-case scenario, while refiners are dealing with immediate shortages and rising costs.
One of the clearest signs of strain in the market is the pricing strategy adopted by Saudi Aramco, the world’s largest oil exporter.
The company has sharply increased its official selling prices (OSPs) for May-loading cargoes, setting record premiums for its benchmark Arab Light crude.
For Asian refiners, the OSP for Arab Light has been raised to a premium of $19.50 per barrel over the Oman/Dubai benchmark. This represents a dramatic increase from the $2.50 premium applied to April-loading cargoes.
Based on current market levels, this could push the effective cost of Arab Light crude close to $150 per barrel for Asian buyers.
The price hike reflects intense competition among refiners for limited supplies, as well as the broader disruption to global oil flows.
The increase in Saudi prices is likely to reshape global trade patterns. Higher costs may encourage some buyers, particularly in China, to reduce imports of Saudi crude and seek alternative supplies from Russia, Africa, and South America.
China, the world’s largest crude importer, is currently receiving a significant share of Saudi exports. Imports are estimated at 1.37 million barrels per day in April, up from 1.04 million barrels per day in March.
However, the higher prices for May-loading cargoes could prompt Chinese refiners to scale back purchases, potentially freeing up supply for other Asian markets.
Countries such as Japan and South Korea, which have seen their Saudi imports decline sharply, may benefit from this shift. South Korea’s imports are projected to fall to 520,000 barrels per day in April, the lowest level in over a decade. Similarly, Japan’s imports are estimated at just 373,600 barrels per day, also a multi-year low.
The ongoing disruption in oil markets is expected to have uneven effects across different regions. Wealthier economies with greater financial resources are likely to secure sufficient supplies, even at elevated prices.
In contrast, developing nations in Asia and Africa may face significant challenges. Limited access to affordable fuel could lead to shortages, increased inflation, and broader economic strain.
The situation underscores the vulnerability of emerging markets to external shocks, particularly in critical sectors such as energy.
At the heart of the crisis is the Strait of Hormuz, a narrow waterway through which up to 20% of the world’s oil, refined products, and LNG flows.
Any disruption to this route has immediate and far-reaching consequences for global energy markets. The recent tensions have highlighted the strategic importance of the strait and the risks associated with its potential closure.
Even if a ceasefire leads to a reopening of the waterway, restoring confidence among shipping companies and insurers may take time.
The oil market impact of US Iran conflict will ultimately depend on the outcome of the ongoing negotiations. A successful agreement could stabilize prices and gradually restore supply chains.
However, the path to such an outcome is far from assured. Deep disagreements over strategic issues, including control of the Strait of Hormuz and Iran’s nuclear program, continue to pose significant obstacles.
In the meantime, physical markets are likely to remain tight, with refiners facing ongoing challenges in securing supplies.
The recent drop in oil prices reflects hope that diplomacy can prevent further escalation. But beneath the surface, the global oil market remains under intense pressure.
The disconnect between futures markets and physical supply conditions highlights the fragility of the current situation. While traders may react quickly to headlines, the real challenges of supply disruptions take much longer to resolve.
As negotiations begin, the coming weeks will be critical in determining whether the current ceasefire can evolve into a lasting solution.
For now, the global oil market stands at a crossroads, caught between the promise of de-escalation and the reality of ongoing disruption.
