US-Iran peace deal eases oil risk premium, supply risks persist

At 11.12am (India time), the August contract of Brent on the Intercontinental Exchange was trading at $83.57 a barrel, lower by 4.36% from its previous close. The July contract of the West Texas Intermediate on the NYMEX fell 4.70% to $80.89 per barrel.

Brent prices are down about 30% from near $120 a barrel on 2 March, after markets reopened following the US and Israel’s attacks on Iran on 28 February.

Supply constraints

Even if diplomatic momentum holds, analysts warn global crude flows are unlikely to normalize quickly, limiting the scope for price recovery.

The Strait of Hormuz, which carries about 20% of global oil and gas trade, has been heavily disrupted since the conflict escalated. The blockade of the strait—first imposed by Iran after the war began in late February, followed by a US naval blockade in April—severely disrupted global energy flows.

While easing restrictions would support shipping volumes, production-side constraints remain binding. Damage to refining infrastructure and gas facilities means output cannot return to normal quickly, even if maritime routes reopen.

“There will be an immediate impact on prices. However, as 10-12 million barrels per day of oil production is out of the supply chain, the shut facilities may not immediately restart. Some facilities have also been damaged, which will prolong normalization. For oil prices to reach the pre-war levels of around $70 per barrel, it would take considerable time,” Prashant Vashisht, senior vice president and co-group head, corporate ratings, ICRA Ltd said.

Experts suggested prices may remain rangebound at $80-90 per barrel if the deal holds and stability returns to West Asia.

Madan Sabnavis, chief economist at Bank of Baroda, said, “It is largely believed that it will take time for West Asia to ramp up production of oil and gas which can take at least six months. Hence while prices may not go up further, they would continue to be rangebound in the area of $80-90/barrel rather than $90-100/bbl.”

The International Energy Agency, in its oil market report for May, said demand could recover later this year if flows through the Strait of Hormuz gradually resume from the third quarter (July-September) of 2026, though supply recovery is expected to lag.

“As a result, the oil market remains in deficit until the final quarter of the year. With global oil inventories already drawing at a record clip, further price volatility appears likely ahead of the peak summer demand period,” it said.

QatarEnergy CEO Saad Sherida Al-Kaabi has also warned that restoring full output at the Ras Laffan LNG complex, accounting for about 20% of global LNG supply, could take three to five years following missile strikes on the facility.

Taken together, tentative diplomacy and slow physical recovery suggest oil markets remain exposed to volatility even as headline geopolitical risk appears to be easing.

Before Israel and the US attacked Iran on 28 February, crude traded near $70 a barrel. Since then, prices have largely stayed above $100 for most of the past three months.

India impact

For India, the shift in oil prices carries direct fiscal and inflation implications given its heavy dependence on imported crude.

The country imports about 90% of its oil requirement, with an annual import bill of roughly $123 billion. Every $1 per barrel increase in oil prices raises the import bill by about ₹18,000 crore.

The recent surge has already fed into domestic fuel prices. After keeping retail rates unchanged for nearly two years, state-run oil marketing companies raised petrol and diesel prices by about ₹7.5 per litre from 14 May.

In New Delhi, petrol is currently sold at ₹102.12 per litre, while diesel is priced at ₹95.20 per litre.

Earlier this month, citing uncertainties over the duration of the West Asia war and forecasts of a sub-par monsoon, the Reserve Bank of India downgraded its growth outlook while raising inflation projections. It also expects inflation to inch up, with consumer price inflation now forecast at 5.1% in FY27, up from 4.6% earlier.

India’s retail inflation rose to 3.93% in May from 3.48% in the previous month, according to provisional government data.

Market signals

Market sentiment is being driven in part by political statements pointing to the breakthrough.

Taking to Twitter, Pakistan’s Prime Minister Shehbaz Sherif, said, “Following intensive talks, we are pleased to announce that the Peace Deal between the United States of America and Islamic Republic of Iran has been REACHED. Both sides have declared the immediate and permanent termination of military operations on all fronts, including in Lebanon.”

He added that the official signing ceremony will be on 19 June in Switzerland.

Pakistan has played a facilitating role in contacts between Washington and Tehran in recent months.

“With the agreement now in place, mediators will facilitate a series of meetings this week. These pre-implementation discussions will lay the foundation for the technical talks and the official signing ceremony,” he said.

US President Donald Trump wrote on Truth Social, “The Deal with the Islamic Republic of Iran is now complete. Congratulations to all! I hereby fully authorize the toll free opening of the Strait of Hormuz, and, simultaneously herewith, authorize the immediate removal of the United States Naval blockade. Ships of the World, start your engines. Let the oil flow!”

However, given that Israel has again hit Lebanon and Israel’s concerns that the peace framework leaves Iran’s missile programme, regional proxy networks and nuclear capabilities largely untouched, Ajay Srivastava, founder Global Trade Research Initiative (GTRI), said, “The disagreement highlights the fragility of the accord and raises questions about its long-term durability. For the agreement to succeed, Washington may need to restrain Israeli actions that could undermine the peace process.”