Crude oil prices, which had briefly exceeded $100 per barrel due to escalating tensions in the Middle East, are showing signs of a decline.
On September 25, WTI crude oil futures fell to $92.41 per barrel.
The backdrop to this was the expectation of progress in negotiations between the United States and Iran. Iran proposed a plan to reopen the Strait of Hormuz within seven days and proceed with negotiations toward a final agreement if the U.S. meets certain conditions. In Saudi Arabia, the East-West oil pipeline, which had been shut down due to an attack, also resumed operations, slightly easing concerns about crude oil supply.
However, that optimism is facing a sudden brake.
The Wall Street Journal reported on the 25th, citing U.S. officials, that President Trump had rejected Iran’s ‘7-day plan’ and told his aides about the possibility of after the U.S. midterm elections in November, resuming airstrikes on Iran.
While the U.S. government has not officially decided to resume airstrikes at this time, if true, it would be a major upside risk for the crude oil market that had been falling in anticipation of a de-escalation between the U.S. and Iran.
The crude oil market is now at a crossroads between two opposite scenarios: ‘supply normalization’ and ‘re-escalation of combat’.
This time, we will organize the ‘good factors’ that push crude oil prices down and the ‘bad factors’ that push them back up, and look at what to pay attention to in the future in an easy-to-understand way.
Current market conditions
The crude oil market is currently in a phase where two opposing factors are strongly colliding: ‘significant decline if there is a ceasefire and normalization of Hormuz’ vs ‘sharp rise again if negotiations break down and the front expands’.
On the 25th, expectations for a ceasefire became dominant, and WTI fell by about 2%. Reports that U.S.-Iran talks have moved to a more concrete ‘technical stage’ have improved market sentiment.
Organizing the factors affecting crude oil prices, the current composition is as follows.
The point is that it is ‘whether it can be transported’ rather than the ‘production volume’ of crude oil that is currently influencing prices.
Positive impact on crude oil prices
① The biggest positive factor: progress in negotiations between the U.S. and Iran
This is the most important point.
Iran has proposed a plan to reopen the Strait of Hormuz within 7 days if the U.S. accepts certain conditions. There are also reports that discussions between the U.S. and Iran have moved from initial contact to more concrete technical discussions. This is a very significant downward factor for crude oil.
Before the war, the Strait of Hormuz was a vital route through which about 20% of the world’s crude oil and LNG supply passed. If it returns to a state where it can operate normally and safely, the ‘geopolitical risk premium’ currently built into crude oil prices will shrink.
In other words, the flow is:
U.S.-Iran agreement
→
normalization of the Strait of Hormuz
→ increased tanker transport → receding supply anxiety →
crude oil price decline
.
The decline in crude oil on the 25th can be seen as the market beginning to price in this scenario a little.
② Positive factor: Saudi East-West pipeline resumes
Another important point is Saudi Arabia.
The East-West oil pipeline that had been stopped due to the attack has resumed operations.
This is an important route that can transport crude oil from the Persian Gulf side to the Yanbu port on the Red Sea side without passing through the Strait of Hormuz.
At the time of the shutdown, there were concerns about the impact on transport capacity equivalent to up to about 4% of global supply. It is currently operating at a reduced speed but has resumed operations.
Therefore,
resumption of the East-West pipeline
→ export from Yanbu port → reduced dependence on Hormuz → recovery of global supply →
crude oil price decline
. In fact, crude oil prices faced downward pressure following reports of the resumption. However, there is a point to note here.
According to Reuters, it may take about 6 to 8 weeks for a full recovery. In other words, ‘resumption’ does not mean ‘complete normalization’.
③ Positive factor: More crude oil is passing through the Strait of Hormuz
Another thing to pay attention to is actual shipping transport.
According to U.S. officials, on the 23rd,
about 60 merchant ships
—of which about 40 were in coordination with the U.S. military—carrying about 22 million barrels of crude oil passed through the Strait of Hormuz.
However, Reuters itself states that it has not been able to independently verify these figures from U.S. officials, and there is a discrepancy with shipping data, so the figures themselves should be treated with caution. Even so, if transport volume heads toward recovery, it is a downward factor for crude oil prices.
Negative impact on crude oil prices
On the other hand, the ‘negative impacts’ are also quite significant;
this is what makes the current crude oil market difficult.
1. The biggest negative factor: Negotiations are not yet an agreement.
The fact that ‘discussions have moved to a technical stage’ is completely different from ‘a ceasefire has been established.’ a ceasefire has been established The Iranian side is demanding the easing of military pressure and blockades by the U.S. as conditions for reopening the Strait of Hormuz.
In other words,
progress in negotiations
≠
ceasefire agreement
≠
full normalization of the Strait of Hormuz.
If negotiations break down after the market has already priced in expectations of a ceasefire, the backlash in the opposite direction could be significant.
2. The biggest tail risk: The front line expands to the Indian Ocean.
Even more important is the military warning from the Iranian side.
Safavi, a military advisor to the Supreme Leader, has mentioned the possibility that if the U.S. attacks again, the front line will expand from the
Persian Gulf
→ Strait of Hormuz → Red Sea →
Indian Ocean.
This is a very significant risk for the crude oil market.
If it were only the Strait of Hormuz, some of it could be bypassed using the Saudi East-West Pipeline and other means.
However, if security risks spread simultaneously to the
Strait of Hormuz + Red Sea + Indian Ocean
, the safety of the bypass routes themselves will decrease.
Then, not only crude oil prices, but also
tanker freight rates
+
war insurance premiums
+
shipping days
+
supply disruption risks
could all rise.
3. The Houthis are also important.
Just because the Saudi East-West Pipeline has resumed does not mean we can rest easy.
This route ultimately exports from the Yanbu port on the Red Sea side.
Therefore, if security on the Red Sea side deteriorates, the benefits of the alternative route of ‘avoiding Hormuz and going to the Red Sea’ will decrease.
In fact, while there are expectations for improved supply due to the resumption of the Saudi pipeline, the continued attacks in the Middle East are still being recognized as a supply risk.
‘5 Points’ to watch for future crude oil prices
From here on, it is easier to understand the situation by looking at the following 5 items rather than the WTI price itself.
-
Whether the U.S. and Iran actually reach a formal agreement document
-
Whether traffic through the Strait of Hormuz returns to peacetime levels
-
To what extent the Saudi East-West Pipeline recovers its capacity
-
Whether attacks by the Houthis on Saudi Arabia and the Red Sea continue
-
Whether U.S. attacks against Iran are resumed
1 and 2 are particularly important.
‘3 Scenarios’ for crude oil prices
Positive scenario
U.S.-Iran agreement → Hormuz reopens → Saudi exports normalize → Red Sea tensions ease → supply anxiety recedes →
strong downward pressure on crude oil prices
Intermediate scenario
Negotiations continue → Hormuz partially open → Saudi exports gradually recover → attacks continue sporadically →
crude oil fluctuates in a high price range
Worst-case scenario
Negotiations break down
→ The U.S. attacks again
→ Iran retaliates
→ Expansion to the Strait of Hormuz, the Red Sea, and the Indian Ocean
→ Tanker transport decreases again
→ Crude oil prices skyrocket
is the structure.
For Japan, what is important is not that it ‘fell to the $90 range,’ but the substance behind it
This WTI decline is not because global crude oil demand has plummeted, but primarily due to a retreat in supply concerns as the possibility of transporting crude oil from the Middle East has increased. This is a relatively good type of crude oil price drop for Japan.
If this trend continues, it will lead to
lower crude oil prices
→ lower import prices → easing upward pressure on gasoline, electricity, and logistics costs → easing inflationary pressure in Japan.
On the other hand, as far as the current data shows, it is still difficult to say that the supply chain has completely normalized. In particular, it is important whether three points are met: ‘formal agreement on the reopening of Hormuz,’ ‘full restoration of the Saudi East-West Pipeline,’ and ‘ensuring the safety of the Red Sea.’
Therefore, to describe the current situation in one word,
the crude oil market has tilted slightly from a ‘supply crisis’ to ‘expectations for supply normalization.’ However, if negotiations break down, it could return to a supply crisis.
I think this is the easiest way to organize it. The WTI decline and U.S. stock rebound on the 25th can also be understood as the market beginning to price in these ‘normalization expectations’ in advance.
Summary
In the crude oil market, WTI crude oil futures have fallen to the $92 range due to progress in U.S.-Iran negotiations and expectations for the reopening of the Strait of Hormuz.
However, there are reports that President Trump has rejected Iran’s ‘7-day proposal’ and is considering resuming airstrikes after the midterm elections, so the situation is not yet one to be relieved about. If the U.S. resumes attacks and Iran retaliates, the chaos could spread from the Strait of Hormuz to the Red Sea and further to the Indian Ocean, potentially causing crude oil prices to skyrocket again.
The biggest focus going forward is whether the U.S. and Iran will move toward a ceasefire or if fighting will intensify once again.
Movements in crude oil prices are directly linked not only to gasoline, electricity, and gas bills, but also to prices in Japan for food and logistics. We must continue to closely monitor U.S.-Iran negotiations and developments in the Strait of Hormuz, rather than thinking, ‘It’s safe because it fell to the $92 range.’
Thank you for reading to the end.
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