Oil Prices Plunge Amid Strait of Hormuz Reopening

Oil prices experienced a sharp decline on Wednesday, with Brent crude falling nearly 5% to $73.30 per barrel and West Texas Intermediate (WTI) dropping over 4% to just under $70 per barrel. This marks a significant drop of approximately $20 per barrel for Brent and $18 per barrel for WTI over the past two weeks. The decline is attributed to market optimism regarding the reopening of the Strait of Hormuz, following a memorandum of understanding (MoU) between the US and Iran that temporarily halts hostilities and includes provisions for reopening the strait, through which one-fifth of the world's oil and liquefied natural gas flows.

Strait of Hormuz Activity Rebounds

MarineTraffic reported 31 verified vessel crossings through the Strait of Hormuz on Tuesday, indicating a "sharp rebound" in activity over the last two weekends. The strait appears operational under the US-Iran MoU framework, though caution persists due to continued dark-route activity and uncertainty beyond the current 60-day window. US Energy Secretary Chris Wright confirmed that crude flows through the strait are approaching pre-war levels, with approximately 72 ships carrying 20 million barrels of oil navigating the waterway in the prior 24 hours.

US Oil Inventories Continue to Decline

Despite positive signals from the Strait of Hormuz, US oil inventories fell significantly last week. According to the US Energy Information Administration (EIA), total inventories dropped by 15.1 million barrels to 743.3 million barrels. The Strategic Petroleum Reserve (SPR) decreased by 9.1 million barrels to 331.2 million barrels, while commercial stockpiles fell by 6.1 million barrels to 412.1 million barrels. PVM Oil Associates noted that supplies may not grow quickly enough to turn anticipated deficits into surpluses.

Market Sentiment and Contradictory Factors

Markets appear buoyed by the ceasefire, the US lifting its naval blockade of Iran, the disappearance of force majeure declarations in the Persian Gulf, and waivers allowing Gulf producers to resume exports. PVM Oil Associates summarized that available oil supply is rising, which is clearly reflected in price movements. However, contradictory factors—such as protracted peace talks without firm commitments, occasional threats to reignite hostilities, and damage to the Russian oil sector from Ukrainian drone attacks—have been relegated to the back of the market's collective memory and compartmentalized.