Diplomatic Optimism Erodes Oil’s Risk Premium, but Refined Product Crisis Persists

Oil flows through the Strait of Hormuz are quietly recovering, while growing optimism surrounding diplomatic efforts is eroding the war-risk premium that had previously been built into crude prices. Brent crude futures fell to an intraday low of $86.22 per barrel on Thursday before rebounding above $88, leaving the benchmark down 6.3% for the week.

According to reports, Kuwait and Qatar are resuming crude exports through the critical maritime chokepoint, with total daily oil shipments through the strait recovering to roughly 75% of prewar levels. The rebound has significantly eased market concerns over potential supply disruptions.

A senior Iranian source said Iran and Oman are “still discussing the details” of an agreement related to the Strait of Hormuz. Earlier this month, Iran said the agreement was close to being finalized.

Bloomberg, citing people familiar with the matter, reported that crude shipments from Kuwait and Qatar have recovered to roughly 70% of their combined prewar level of 2 million barrels per day. Overall, tanker-borne oil flows through the Strait of Hormuz have climbed to between 7 million and 8 million barrels per day, sharply higher than approximately 4 million barrels per day in mid-July and equivalent to around 75% of prewar volumes.

London-based energy and shipping analytics firm Vortexa, meanwhile, estimates that the seven-day moving average of oil transit volumes through the Strait of Hormuz has approached 10 million barrels per day.

Shipping research firm TankerTrackers reported that at least 15 ship-to-ship (STS) transfer operations were taking place simultaneously in the Gulf of Oman that day, involving approximately 25 million barrels of crude oil as well as some refined products. The cargoes originated from nearly every major producer in the region except Iran. The United Arab Emirates was among the first countries to resume crude shipments through the strait.

The key driver behind the recovery in shipping volumes is an emerging diplomatic framework between Iran and Oman. The two sides are reportedly discussing the establishment of a “temporary joint maritime corridor” while cooperating to clear mines from the strait. President Trump said earlier this week that all mines had been removed.

The market reaction has been notable, with some traders suggesting that crude prices are beginning to reflect the possibility of a peace agreement arriving sooner than previously expected.

Analysts, however, remain cautious about whether the framework can ultimately be implemented. UBS analysts noted that the proposed “temporary joint maritime corridor” between Iran and Oman has been weighing on oil prices. Yet with the United States simultaneously intensifying economic pressure on Tehran, it is difficult to envision Washington endorsing such an arrangement. The Trump administration and Tehran remain deadlocked over the terms of a potential resolution.

The recovery in Strait of Hormuz traffic largely explains Brent crudes retreat from above $120 per barrel in late April to its current range in the $80s. Traders have gradually been unwinding long positions established earlier to capture the war-risk premium embedded in oil prices.

However, the nature of the energy crisis itself is changing.

Damage to Middle Eastern refining infrastructure, combined with Ukraines continued attacks on Russian refineries, has shifted the center of the crisis from crude supply toward shortages of refined petroleum products.

U.S. diesel crack spreads remain elevated above $90 per barrel after briefly reaching a record $100 per barrel last week, while global diesel inventories remain critically tight. Even if crude flows through the Strait of Hormuz continue to normalize, pressure in refined product markets is unlikely to ease fundamentally in the near term.

The recovery in oil flows through the Strait of Hormuz, together with growing diplomatic optimism, is reducing the war-risk premium embedded in crude prices and providing some near-term relief for global energy markets.

However, fundamental differences between the United States and Iran remain unresolved, while shortages of refined petroleum products continue to intensify. As a result, the structural tightness in global energy markets has yet to disappear.

In the near term, oil prices are likely to remain highly sensitive to actual progress in restoring safe navigation through the Strait of Hormuz as well as developments in U.S.-Iran negotiations. Over the medium to long term, energy supplies are unlikely to achieve genuine stability until the parties reach an enforceable agreement that can ensure maritime security.

Investors should therefore closely monitor the twin risks of continued stress in refined product markets and evolving geopolitical tensions.