Oil's War Premium Unwinds as Hormuz Reopens — But the Ceasefire Is Fraying on Two Fronts

The market tell: oil has given back its war gains

Brent crude settled at $72.12 a barrel on Friday, July 3, with WTI at $68.78 — levels last seen before the US-Iran war broke out, when Brent closed at $72.48 and WTI at $67.02 on February 27.{{cite:chatcmpltool}} The geopolitical risk premium that pushed prices higher during the conflict has been steadily stripped out as shipping through the Strait of Hormuz recovers and supply fears ease. On a weekly basis, Brent gained just 0.18 percent while WTI retreated 0.65 percent, a muted finish heading into the July 4 holiday weekend with US markets closed.{{cite:chatcmpltool}}

This is not a market in panic. It is a market repricing the absence of a shock that had been priced in.

But two developments this week — Iran’s escalation of its toll demands in Hormuz and Ukraine’s overnight drone strike on a major oil terminal in St. Petersburg — are reminders that the truce architecture is under stress on two separate fronts. The question is whether the unwind is the beginning of a sustained move lower, or a pause before the next disruption.

Hormuz: 10 million barrels flowing, but the toll fight is live

Commercial shipping through the Strait of Hormuz has surged to more than 10 million barrels per day, according to a US official, with American military support — including air power and naval forces coordinated by US Central Command — giving shippers confidence to use the southern transit corridor closer to Oman.{{cite:chatcmpltool}} Before the war, Hormuz handled roughly a fifth of the world’s oil and LNG, with about 20 million barrels per day flowing on average. With 10 million now transiting plus another 5 million via alternative routes, flows are approaching normal levels.{{cite:chatcmpltool}}

The UAE has led the rebound, with exports climbing nearly 30 percent in June to near their highest level since 2017, using its Habshan-Fujairah pipeline to bypass the strait entirely.{{cite:chatcmpltool}}

The recovery, however, has not resolved the fundamental dispute over who controls the waterway. The 14-point memorandum of understanding signed electronically on June 17 by President Trump and Iranian President Pezeshkian extends a ceasefire by 60 days and commits to reopening Hormuz within 30 days of signing.{{cite:chatcmpltool}} It provides for toll-free traffic during the negotiating period. But Trump and Secretary of State Rubio have stated that both tolls and maritime service fees would be “unacceptable” in a final deal — a line Iran has not accepted.{{cite:chatcmpltool}}

Iran’s joint military command warned Thursday that all oil tankers transiting Hormuz must use its approved routes or face a “forceful response,”{{cite:chatcmpltool}} and Iran breached the US measures last week with a drone attack on a Singapore-flagged container ship, which set off retaliatory strikes that put the truce on shaky ground.{{cite:chatcmpltool}} Iran has also refused a US proposal to unlock frozen assets in exchange for dropping its toll demand, while Oman has proposed a voluntary maritime fund as a compromise.{{cite:chatcmpltool}}

The standoff is not academic. If the 30-day reopening deadline passes without a durable framework, or if Iran imposes tolls unilaterally after the 60-day toll-free window, the market optimism that drove oil back to pre-war levels could reverse quickly. Shippers, oil industry officials, and stakeholders have warned that any tolls would be an unacceptable violation of international law that could set a precedent for charges in other waterways.{{cite:chatcmpltool}}

The second front: Ukraine’s deepening strikes on Russian refining

While the market’s attention has been fixed on Hormuz, Ukraine has been systematically dismantling Russia’s domestic refining capacity. A Ukrainian drone attack struck a major oil terminal in St. Petersburg overnight on July 4 — described by Ukraine’s military as “one of the largest” in Russia.{{cite:chatcmpltool}} President Zelensky called it infrastructure that “generates revenue for Russia’s war.”{{cite:chatcmpltool}}

Ukraine’s General Staff now claims its strikes have disabled 42.74 percent of Russia’s oil refining capacity as of early July, having struck eight Russian refineries over the past month.{{cite:chatcmpltool}} Fuel shortages have spread across more than 40 Russian regions, prompting authorities to impose sales limits.{{cite:chatcmpltool}} Putin is facing rare public criticism at home as fuel shortages, rising inflation, and mounting military casualties compound the war’s domestic costs.{{cite:chatcmpltool}}

The market implications here are counterintuitive. Ukraine’s strikes on Russian refining capacity could, in theory, tighten global refined-product supply. But Russia’s crude exports have not been proportionally disrupted — the strikes target refining, not extraction — and the global crude market is focused on the Hormuz supply recovery. The net effect has been absorbed without a price spike, suggesting the market currently views Russian refining disruptions as a regional logistics problem rather than a global supply shock.

OPEC+ adds supply into a softening market

OPEC+ is expected to approve another output increase of approximately 188,000 barrels per day for August at its July 5 meeting, marking a third consecutive monthly hike as crude prices decline.{{cite:chatcmpltool}} The seven core members are unwinding a 1.65 million bpd voluntary cut. The UAE, which quit OPEC in May over a quota dispute, is no longer bound by any such decision and exports freely.{{cite:chatcmpltool}} Iraq has threatened to leave the group unless its quota is raised to reflect its output capacity and post-war reconstruction needs.{{cite:chatcmpltool}}

The supply overhang is now visible on the curve: the six-month Brent spread turned negative this week, tipping the market into contango for the first time in months — a structure where forward prices exceed spot prices, typically signaling adequate or excess supply.{{cite:chatcmpltool}}

Citigroup now sees Brent declining to $60 a barrel by year-end, with analyst Francesco Martoccia recommending selling summer rallies and expecting a $60 to $65 range by December.{{cite:chatcmpltool}} Goldman Sachs and Morgan Stanley have sounded similarly bearish, suggesting a swing back into oversupply.{{cite:chatcmpltool}} Julius Baer’s Norbert Rucker pointed to a “magnet in the sub-70s” pulling Brent lower, arguing the physical market has flipped from deficit to surplus, compounded by hedge funds rushing from long to short positions in futures.{{cite:chatcmpltool}}

What would have to be true for each side

The bearish case — oil heading toward $60 — requires three things to hold simultaneously: the US-Iran ceasefire survives the 60-day window and transitions to a permanent agreement, Hormuz traffic continues recovering toward its pre-war 20 million bpd baseline, and OPEC+ continues its gradual unwinding without a collective change of heart. The base rate for ceasefires holding in conflict zones is not encouraging — historically, roughly half of negotiated ceasefires collapse within the first year. But the specific incentives here are unusual: Trump has explicitly said he does not want to be remembered as “Herbert Hoover,”{{cite:chatcmpltool}} and Iran’s leverage has demonstrably eroded as it discovered its ability to monitor and control the southern transit corridor was more limited than assumed.{{cite:chatcmpltool}}

The bullish case — a reversal back toward war-era highs — requires any one of several triggers: Iran unilaterally imposes tolls or restricts traffic after the toll-free window, the ceasefire collapses with renewed military exchanges, or Ukraine’s refining strikes begin to meaningfully disrupt Russian crude export volumes rather than just domestic fuel supply. None of these is a low-probability tail risk. The drone attack on the Singapore-flagged ship last week demonstrated that the ceasefire is already fraying at the edges.{{cite:chatcmpltool}}

The asymmetry matters: the bearish case requires three things to go right; the bullish case requires only one to go wrong.

What to watch next

• July 17 — the 30-day Hormuz reopening deadline. Signed on June 17, the MOU commits to reopening the strait within 30 days. If that passes without a durable framework, market optimism reverses. This is the single most important date on the calendar.
• OPEC+ meeting, July 5. The expected 188,000 bpd increase is largely priced in, but any signal on the pace of future unwinding or quota disputes (Iraq, UAE exit implications) could shift the curve.
• Iran’s toll posture after the 60-day window. The toll-free period expires roughly mid-August. Iran’s refusal of the frozen-assets deal suggests it intends to press its claim.{{cite:chatcmpltool}} Watch for whether Oman’s voluntary maritime fund compromise gains traction.
• Russia’s refining capacity and fuel crisis. If Ukraine’s claim of 42.74 percent disabled refining holds and shortages deepen, watch for Russian export-policy changes or domestic price controls that could ripple into global product markets.
• US jobs data and Fed path. The tepid May non-farm payroll report of 57,000 jobs — about half the 110,000 expected — tamed expectations for an immediate rate increase.{{cite:chatcmpltool}} A weaker dollar supports oil prices; a hawkish Fed surprise would do the opposite.
• Hedge fund positioning. The rush from long to short in futures{{cite:chatcmpltool}} means the market is crowded on the bearish side. A ceasefire violation or Hormuz incident could force a sharp short-covering rally.