Oil's War Premium Could Vanish Fast Once a Hormuz Deal Lands, Analysts Warn
Oil's war premium has pushed Brent crude roughly $20 above its fair value, with analysts warning of a steep sell-off once a Hormuz deal is reached.
Brent crude currently trades approximately $20 above its fair value according to JPMorgan's estimates, with analysts at Fitch Solutions unit BMI predicting a significant price decline once Washington and Tehran reach a preliminary Hormuz deal. US Energy Secretary Chris Wright has characterized the price spike as temporary, while BMI projects such a deal could materialize as early as early 2027.
JPMorgan's model places Brent's fair value at $94 per barrel, substantially below the current market price near $114. The bank's analysts have found no evidence that freight costs adequately explain this price differential, pointing instead to geopolitical risk as the primary factor driving the premium.
Historical Context
Historically, periods where Brent crude traded more than 5% above its fair value have lasted an average of 3.8 months, though JPMorgan acknowledges that uncertainty can push prices significantly beyond this level. BMI forecasts Brent to average $107 this quarter and $112 in the first quarter of 2027.
BMI expects a preliminary deal to trigger a steep sell-off. Rising OPEC and non-OPEC supply would then push Brent to an average of $67 in the fourth quarter of 2027.
Counter Risks
Meanwhile, Wright has noted that large US forces are currently escorting ships through Hormuz, though he declined to provide price forecasts or operation costs. He attributed elevated prices to a global refining shortage, while BMI suggests refined fuels might recover more slowly than crude even after a deal.
BMI also warns of the opposite risk, as a return to high-intensity fighting could push prices beyond previous war peaks. Ole Hansen from Saxo Bank cites reports of potential US and Israeli strikes on Iran following the November 3 midterms, with Israel's political deadlock adding uncertainty to the conflict's trajectory.
JPMorgan estimates Asia's implied transport cost at $38 per barrel, compared to $13 for Europe, attributing this disparity to a tanker shortage driving costs higher.
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