Oil prices face steepest weekly fall in two years as West Asia war premium fades

Oil prices are heading for their worst weekly decline since March 2023, with traders stripping out any risk premium built up over fears of a wider Israel–Iran conflict in West Asia. Despite last week’s dramatic escalation, markets see no significant supply disruption as a ceasefire holds, pushing benchmark crude prices back to pre-conflict levels.

War premium fades as ceasefire holds

As per Reuters, Brent crude futures rose 35 cents, or 0.52 per cent, to US$68.08 a barrel in early trade on Friday, while US West Texas Intermediate (WTI) gained 40 cents, or 0.61 per cent, to US$65.64. Yet both benchmarks remain on track for a weekly fall of about 12 per cent—their steepest drop in more than two years. Prices had jumped to five-month highs earlier this week after US strikes targeted Iranian nuclear facilities over the weekend, fuelling fears of an all-out war that could threaten West Asian oil exports.

But those gains quickly evaporated after US President Donald Trump announced a ceasefire deal on Tuesday, easing fears of a supply shock. As per Reuters, traders swiftly priced out the geopolitical risk that had driven the rally.

Analysts see oversupply despite conflict

According to Reuters, analysts note that while tensions remain, there is no visible impact on physical oil supply so far. Macquarie analysts wrote in a note on Thursday: “Absent the threat of significant supply disruption, we still view oil as fundamentally oversupplied, with our 2025 balances indicating a roughly 2.1 million barrels per day surplus.”

Macquarie has slightly raised its WTI price forecast by US$2 to account for a modest ongoing geopolitical risk premium. But the broader outlook remains bearish, with global supplies seen as ample and OPEC+ still holding spare production capacity.

US inventory draw offers limited support

Even as the war premium vanished, oil prices found some support midweek from signs of tightening US stockpiles. As per Reuters, US government data showed crude oil and fuel inventories declined in the most recent reporting week, reflecting higher refinery utilisation and demand. Phil Flynn, senior analyst at the Price Futures Group, told Reuters the market was “starting to digest the fact that crude oil inventories are very tight all of a sudden.” Despite that, the bullish impulse proved limited, with the broader market narrative dominated by relief that West Asian energy infrastructure remained unharmed.

Beyond the ceasefire in West Asia, traders are also watching US monetary policy for clues about demand. As reported by the Wall Street Journal, President Trump may announce his choice for the next Federal Reserve chair earlier than usual—a move that has fuelled market bets on possible interest rate cuts. Lower US rates could typically stimulate economic activity and energy demand, offering a potential tailwind for oil prices.

But for now, the dominant factor this week has been the unwinding of war-driven price gains, as traders conclude the Israel–Iran ceasefire has largely defused the immediate threat of major supply disruptions.

(With inputs from the agencies)