Will Oil Prices go back to their pre-war level?

Will oil prices go back to their pre-war levels?

Hmm… maybe not.

Let’s analyze this.

Why oil prices have increased?

Factor 1: Imbalance in demand and supply due to constraints in fleet movement following the closure of the Strait of Hormuz.

Factor 2: Increase in insurance costs due to war risks looming over the region.

So far, in this war, there is no clear winner or loser. Ideological wars are the most difficult to fight… the powers involved are still intact in their positions, which increases uncertainty. No one knows how long this ceasefire will last. Maybe in a couple of months, there will be more strikes… more political chaos… more economic sanctions.

No one knows.

And that’s where uncertainty and fear come in… rapidly increasing insurance premiums.

Let’s assume that, through some agreement, the Strait of Hormuz opens indefinitely and fleets begin to move freely… will the fear and uncertainty disappear?

No, it will not.

Nearby countries will always carry a constant sense of risk. They will invest in finding alternative ways to counter this uncertainty.

They might divert fleet movements or reduce their dependency on oil… but this will take significant time and planning. It’s not something that can happen immediately.

So when fear rules… prices follow.

The fear of disruption in demand and supply will persist, continuously impacting insurance costs.

There will be a cumulative effect of these factors, ultimately increasing the landing cost of oil in any country. The addition of local costs and taxes will further make this commodity less affordable.

So, my analysis suggests… the sharp increase in oil prices today may come down slightly, but it is unlikely to return to pre-war levels.