At the end of this week, trends in energy prices (oil and gas) suggest two conclusions: firstly, the oil market was overly optimistic following the signing of the agreement. The sharp fall in oil prices showed that the market was banking on a rapid return to normality. However, it was clear that the agreement was fragile and that negotiations for a long-term deal would remain chaotic. Furthermore, oil supply was far from its normal level: some facilities are still out of operation and shipping traffic through the Strait of Hormuz is less than half its pre-war level.

At the same time, demand is set to be particularly strong in the coming months due to the need to replenish oil stocks, which are at historically low levels in OECD countries. Consequently, even assuming that negotiations go well, the oil market will suffer from an imbalance between supply and demand for several months. In light of these factors, the rise in oil prices is much more in line with market realities.

The market is pricing in a higher-risk premium

Secondly, despite a marked slowdown in traffic through the Strait of Hormuz since the attacks earlier this week and despite the risk of renewed military tensions between the United States and Iran, the rise in oil and gas prices has been fairly contained. Prices remain well below the levels recorded in the second quarter. The market is therefore pricing in a higher-risk premium, but it continues to believe in a diplomatic resolution to the conflict.

The US President’s latest statements seem to confirm that we should not expect prolonged air strikes. This week’s strikes can indeed be seen as an attempt by both sides to reaffirm the balance of power before negotiations continue. That, at any rate, is the scenario the market is currently choosing to believe in.

But all this reminds us of one thing, at any rate: at least until the end of this year, energy prices will remain volatile. The fallout from such a conflict in such a sensitive region does not disappear overnight!