Oil: Gradual recovery and higher risk premium – Societe Generale

Societe Generale analysts Michael Haigh and Jeremy Sellem say a tentative United States (US)–Iran truce has eased immediate oil supply fears, driving a sharp fall in Brent and WTI as markets price a restart of Hormuz flows. Still, they argue that the Brent curve remains elevated, reflecting a persistent risk premium and slow normalisation of Gulf exports.

Risk premium persists despite price drop

"A tentative U.S - Iran truce has been agreed and has provided the market with some relief over immediate supply concerns, but uncertainty still hangs over both the durability of the deal and the upcoming negotiation period. Ongoing regional tensions, including Israeli strikes in Lebanon and delays to planned talks - highlight how fragile the backdrop remains."

"Even so, oil markets have reacted decisively: prompt Brent and WTI have dropped by $25–30/bl since early May, with traders increasingly pricing in a restart of Hormuz flows and the return of around 12mn b/d of disrupted Middle East supply, including Iranian exports. Despite this, the longer end of the curve remains elevated."

"In the near term, Gulf production is set to recover only gradually as flows through the Strait increase in stages, with a full normalisation likely to take several months or longer, a subject we have discussed at length. The slow ramp‑up reflects expectations that tanker operators will avoid pre‑war routes until mine clearance is completed, maritime control is clarified, and disputes over transit fees are resolved."

"Taken on balance, the strait appears slightly less congested than a month ago once reopened. Holding our other assumptions constant, we now estimate ~45 days to return to pre-war flow levels."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)