Analysts Say a Hormuz Pact Could Quickly Erase Oil's War Premium

Brent is running roughly $20 above JPMorgan's fair-value estimate because of the war premium. BMI, the Fitch Solutions unit, expects prices to fall sharply when Washington and Tehran come to a preliminary accord on Hormuz.

US Energy Secretary Chris Wright calls the jump temporary, but BMI regards early 2027 as the most likely window for a Hormuz deal. Crude shipped to Asia averaged $131 a barrel in October, according to JPMorgan.

Is Oil's War Premium Fueled by Fear More Than by Barrels?

JPMorgan calculates a fair value of $94 a barrel for Brent, with the market around $114. The bank sees no sign that freight costs explain the gap, making geopolitical risk the more likely driver.

The same report shows that, on average, periods in which prices stayed more than 5% above that fair value lasted 3.8 months. JPMorgan concedes, though, that uncertainty can push prices well beyond that level.

BMI sees Brent averaging $107 in the current quarter and $112 in the first quarter of 2027.

An initial agreement, BMI believes, would spark a sharp price slide. With supply from OPEC and non-OPEC producers growing, Brent would average $67 in the fourth quarter of 2027.

What Might Keep the War Premium in Place?

Speaking to Bloomberg, Wright said large US forces are escorting vessels through Hormuz. He would not forecast prices or put a figure on the operation's cost.

The energy secretary blamed the high prices on a worldwide shortage of refining capacity. BMI adds that refined products would rebound more slowly than crude even after an agreement.

BMI also warns of the opposite scenario: a return to intense fighting could take prices back above earlier wartime peaks.

Ole Hansen, head of commodity strategy at Saxo Bank, points to reports of possible US and Israeli strikes on Iran. Any such strikes would come after the November 3 midterms, while Israel's election deadlock leaves the war's direction unclear.

JPMorgan calculates Asia's implied transport cost at $38 a barrel, versus $13 for Europe. A shortage of tankers is behind the higher cost.