Fundamentals Dominate as Oil’s War Premium Evaporates

The head-spinning rise and fall of global crude prices over 12 days of missile exchanges between Israel and Iran laid bare the reality of today’s oil market: Fundamentals remain the driving force in pricing trends and can overcome event-driven price moves even in circumstances that in the past may have sparked panic in the market. Even after the US briefly joined the fight over the weekend, with an attack on Iranian nuclear facilities that many feared could set off an uncontainable crisis in the Middle East, crude prices actually fell when it became clear a worst-case scenario for markets — the closing of the Strait of Hormuz and the bombing of production and export assets — would likely not materialize. Now, with benchmark Brent prices at levels seen before Israel started its campaign on Jun. 13, focus has turned back to the market’s uncertain demand and ample supply ahead of a key deadline for US President Donald Trump’s global tariff push. Brent prices spectacularly imploded this week, losing around $14 per barrel over two days to trade below $68/bbl. The market correctly anticipated limited disruption to transit through Hormuz and that both sides would refrain from attacking Mideast Gulf oil export and production facilities — convictions that doubtless limited the temporary war premium in the wake of Israel’s surprise attack two weeks ago. With a ceasefire now in place, and new US-Iran negotiations reportedly on tap, fundamentals that prior to the attack were pointing to an oversupplied market in 2025 and 2026 are again front and center. At the same time, traders have gotten a lot smarter in dealing with risk, with more sophisticated information and financial tools at their fingertips. After the initial Israeli attacks, traders flocked to the Brent options market on oil futures, allowing them to take leveraged positions that helped limit price fluctuations. This shift in war-premium calculations has been under way for years — when Iran-backed Houthi rebels attacked Saudi Arabia’s 5.7 million barrel per day Abqaiq processing facility in September 2019, the premium was also muted and evaporated after two weeks, thanks in part to Saudi transparency in how it would address the issue and the kingdom’s full commitment to actual crude deliveries despite the attack.