Oil volatility returns as Middle East ceasefire tensions shake market outlook

Oil prices climbed about 1% on Friday as a fragile ceasefire between the US and Iran quivered, reigniting conflict and crushing optimism for a swift reopening of the Strait of Hormuz, a vital channel for global oil and liquefied natural gas shipments.

At the time of writing, the Brent crude oil contract was at $101.10 per barrel, up 1.1%, while the price of West Texas Intermediate was at $95.60 per barrel, up 0.8%. 

The benchmarks had surged 3% at the start of Asian trading on Friday. 

Price volatility and peace prospects

After three days of losses, the market saw gains following reports this week that the US and Iran were near a peace agreement. 

The deal would halt the current fighting but postpone addressing larger concerns about Iran's nuclear development.

Despite the recent gains, both contracts are still on track to register a weekly decline of approximately 6%.

The Brent crude contract had fallen to a 10-day low of about $96.80 by midday Thursday, marking a significant 16% drop from its high from earlier this week. 

This decline was triggered by two main factors: the US abandoning its escort plan, and an Axios report indicating that the US and Iran were nearing an agreement on a one-page, 14-point memorandum that could resolve the conflict.

Experts from Rystad Energy believed that even if both the US and Iran reach a peace deal, the physical oil market would remain constrained. 

The Norway-based energy intelligence agency said the futures market would price-in the deal immediately, but restoring supply from the Strait of Hormuz would take another six-to-eight weeks, which would keep spot prices elevated. 

"The market is on the cusp of a complete breakdown. ​Price formation is no longer anchored in a pragmatic reading of the war’s trajectory or the physical realities in the Strait of Hormuz," Vandana Hari, founder of oil market analysis provider Vanda Insights was quoted as saying in a Reuters report.

Market skepticism and renewed conflict

Oil prices surged on Friday after Iran alleged the US had broken the month-long ceasefire.

The US, however, countered that its strikes were in retaliation for Iran firing on American Navy vessels that were navigating the Strait of Hormuz on Thursday.

Despite renewed fighting, US President Donald Trump affirmed to reporters on Thursday that the ceasefire remained active.

This came after Iran's military claimed the US had targeted an Iranian oil tanker, another ship, and civilian areas both on the mainland and within the strait.

The exchange of fire occurred while Washington awaited Iran's response to the most recent peace proposal. 

This proposal failed to resolve several contentious issues, including the US demand to reopen the Strait of Hormuz, which was the passage for one-fifth of the world's oil and LNG supply before the war commenced on February 28.

The US Commodity Futures Trading Commission (CFTC) is investigating approximately $7 billion in oil price trades made just before key announcements by President Trump regarding Iran war policy, Reuters reported on Thursday.

The majority of these trades were short positions bets on prices decreasing placed on the Intercontinental Exchange (ICE) and the Chicago Mercantile Exchange (CME). 

These trades occurred before Trump's statements about attack delays, ceasefires, or other changes in Iran policy, which typically resulted in a decline in oil markets.

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